4 Common Factors That Increase Your Total Loan Balance

Taking out a loan is easy, but paying it back and seeing the balance decrease can be frustratingly difficult. Unfortunately, several common factors during the lifetime of a loan can cause your total balance to balloon. Being aware of what these factors are can help you minimize their impact.

Interest Charges Add Up Over Time

Interest is the cost of borrowing money, charged as a percentage of your principal loan amount. The higher the interest rate and longer the loan term, the more interest you pay overall. Making minimum payments on long-term installment loans or credit cards results in interest being the largest component of your balance.

Late Fees and Penalties Drive Up the Balance

Many lenders charge fees for late payments, exceeding your credit limit, or other rules violations. These fees quickly tack on to your balance, on top of the existing interest charges. Even a single late payment can cost $25 or more depending on the lender.

Deferring Payments Leads to Capitalized Interest

If you postpone or pause your payments through deferment or forbearance, interest still accrues. The unpaid interest gets added back into the principal when payments restart. This capitalized interest then accrues even more interest, since the principal is now higher.

Borrowing More Money Compounds the Problem

Finally, one of the most obvious but often overlooked factors is borrowing additional money. Taking out a new loan or using more credit adds to your overall debt load. The more separate loans and credit accounts you have, the more difficult it becomes to reduce your total balance.

Proactively managing interest charges, avoiding fees, limiting deferments, and not taking on more debt are key to keeping loan balances contained. Also prioritize paying down highest interest debts first. Review your debt frequently and have a plan for paying it off ahead of schedule. With disciplined habits, you can minimize factors that increase your overall debt burden over time.

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