What Increases Your Total Loan Balance?

Article Summary:

Your loan balance may increase if you accrue interest and late fees. While this is most commonly seen in student loans, different loan types may increase for other reasons. Mortgages may increase due to closing costs and property tax changes, and auto loan balances may rise when you trade in a car with negative equity. Fortunately, there are multiple ways to reduce your loan balance.

Have you made regular payments toward your loans each month just to find out that the balance hasn’t gone down at all? You’re not alone. In fact, a lot of borrowers even realize their loan balance has gone up even though they’ve been making regular payments! It can be incredibly frustrating and disheartening to find out your efforts haven’t been paying off.

So how can you prevent this from happening to you? Is there a way to pay down your debt efficiently? In this article, we’ll explain some of the common reasons why your outstanding balance hasn’t budged, what increases your total loan balance, and what you can do to lower that number.

What makes your loan balance go up?

Your loan balance may increase for various reasons depending on the loan you took out. However, there are two common reasons why most loans increase: interest rates and late fees.

Interest capitalization

Interest capitalization is when unpaid interest is added to the principal balance of your loan.

How does this happen? When you take out a loan, you’re charged for borrowing money. This means that the amount you owe on the loan — your principal — keeps growing over time as interest gets added to it. Typically, if you make regular payments, a portion of each payment will pay the interest and the balance goes toward reducing the loan’s principal.

But sometimes, especially if your loan has a high interest rate, the amount of interest that accumulates in a given month can be more than the amount of your regular payment. When this happens, the extra interest gets added to your principal, and your total loan balance goes up. This is common for federal student loans since many students either don’t make payments or can only afford modest amounts.

Late fees

Late fees also contribute to your total loan balance. They’re charged by the lender on an unpaid bill, and they can quickly add up if you’ve missed a few payments.

These charges will increase your monthly payments, which in turn may cause you to miss more of them. If you continue missing payments, your total loan balance will go up, making it even harder to get out of debt.

What makes the balances for different loan types increase?

Before taking out a loan, it’s important to be aware of different scenarios that could cause you to end up with a higher loan balance. This way, you can avoid taking on additional debt.

Mortgage loans

As with any loan, making payments that are smaller than your monthly interest will increase the balance of your loan. But there are other reasons you may see an increase in your monthly payments.

Property tax changes

Although property taxes are not included in the loan amount, it is usually part of the monthly payment. Property taxes aren’t set in stone, which means tax hikes can cause the rate to increase. Because property tax is included in most mortgage payments, a rise in property taxes could make your total mortgage loan balance higher. In the United States, each county has its own property tax rate that could either be higher or lower than the state average.

Closing cost

Mortgage closing costs are typically around 2% to 6% of the total loan cost. This could cause you to have a total mortgage loan balance that’s significantly higher than the amount you needed to borrow. Closing costs often include various fees charged by the lender—such as processing, origination, and underwriting fees—and third parties—such as title insurance and appraisal fees.

If interest rates have dropped or your credit score has improved, you could save thousands of dollars over the life of your home loan with a mortgage refinance.


Auto loans

Late fees and negative equity can also raise your loan amount.

Late payments

If you miss a car payment, you may be subject to late fees. These fees cost around $25 to $50 and will increase the total balance of your auto loan.

Trading in a car with negative equity

If you see that your new car loan balance is higher than you expected, it may be because you rolled the old car loan into it. When you trade in an old car with negative equity, your dealership will most likely offer you to roll over that negative equity into your new car loan. This will cause the loan balance for your new car to increase.

If you want to save money on interest or lower your monthly payments, consider an auto loan refinance.

Why does my student loan balance keep increasing?

You’ve probably heard this question a lot, and for good reason. Even though some borrowers manage to make regular payments while accounting for the additional interest charges, their balances may still increase. How is that possible?

Deferring or forbearing payments

When you defer your student loans, you’re essentially putting your loan payments on hold. This can be a helpful option if you’re temporarily unable to make payments, but there are some things to keep in mind that could cause your total loan balance to increase.

For one, interest will continue to accrue on your loans during the deferment or forbearance period. This means that your total balance will end up being higher than it would have been if you had stayed on track with your payments.

Additionally, if you have subsidized federal loans and the deferment or forbearance period extends past the six-month grace period, the government will no longer pay the interest for you. This could also cause your total loan balance to increase. So be sure to weigh your options carefully before deferring or forbearing your student loans, as these choices can have consequences down the road.

Choosing an income-driven repayment plan

An income-driven repayment plan can be a helpful way to manage your monthly payment and keep them affordable. However, it can also cause you to accrue more interest on your loan balance in the long run.

Income-driven repayment plans generally have a lower monthly payment than other types of repayment plans. That’s because the payment is based on a percentage of your discretionary income, which is usually lower than your total income.

While a lower monthly payment can be helpful short-term, it means that might end up paying more interest on your loan balance over the life of the loan.

Having a variable-rate student loan

When it comes to student loans, there are a few different types of loans you can take out. One of these is the variable-rate loan, which has a rate that can change over time. With this loan type, your student loan interest rate could increase over a 10-year period — which is how long it usually takes for borrowers to pay down the total balance.

So, if you have a variable-rate student loan instead of a fixed interest rate loan, make sure you can pay back the loan as soon as possible. Otherwise, the interest rate could rise significantly and your total loan amount would go up.

Pro Tip

If you have high-interest private student loans, you may want to consider refinancing your student loans to help manage your monthly payment.

Does interest accrual increase your total student loan balance?

Yes, accrued interest can increase your total student loan debt. This ultimately means you pay more money in interest over the life of the loan. It could also lead to a snowball effect where the total amount of your student loan keeps growing larger.

Do student loans increase each year?

According to Education Data Initiative, before adjusting for inflation, the average student loan debt at graduation has increased by 2,807% since 1970. Even after adjusting for inflation, the average debt is still up by 317%.

Currently, in the United States, the average student who just graduated from college is expected to owe around $31,100 in student loan debt. With the gradual effect of interest capitalization, student loan borrowers who have been out of school for years can oftentimes owe more than those who just graduated.

On a national level, the total amount of student loans has also been increasing. Compared to the $0.33 trillion in 2003, the national student loan debt has quickly surpassed $1.7 trillion in 2021.

How can you reduce your total loan balance?

If you’re tired of seeing your loan balance increase despite regular monthly payments, you may want to consider the following tips.

Automatic recurring payments

One way to reduce the chance of accumulating late fees and increasing your total loan balance is to sign up for automatic recurring payments with your lender. That way, you’ll never have to worry about missing a payment or being charged a late fee again.

In addition to avoiding late fees, you may even reduce your monthly bill costs through automatic payments. Some companies, including Nelnet and Verizon, offer incentives to their customers who set up automatic recurring payments.

Consider a shorter repayment term

When you’re choosing a repayment term, it’s important to consider how that will impact your total loan balance. A shorter repayment term typically comes with higher monthly payments, but you’ll limit the amount of interest you accumulate and pay down debt faster.

On the other hand, a longer-term repayment term usually requires lower monthly payments, but this also means accumulating more interest charges over time. So make sure to choose the option that works best for you and your financial situation.

Pay more than your minimum payment

Making only the minimum payment each month will most likely take you years to pay off your loan. In fact, you might even end up paying way more than the original amount borrowed due to interest capitalization. If you can afford it, pay more than the minimum each month to help reduce your total loan balance and save you money in interest payments.

Seek out loan forgiveness and payment options

If you can’t afford the above options, you may consider student loan forgiveness or debt settlement programs. There are also several private companies that offer debt consolidation and repayment plans. If you struggle to make your monthly payments, it’s worth exploring these options to see if they can help you reduce your total loan balance.

Key Takeaways

  • When you make monthly loan payments, you’re paying down the amount of interest and fees you owe first. The remainder then goes toward the principal balance.
  • Late payment fees can quickly add up and increase the amount you owe.
  • Even if your student loan is in forbearance or in its grace period, it could still accrue interest during that time.
  • You can reduce your total loan balance by signing up for automatic payments, considering a shorter repayment term, making larger monthly payments, or opting for loan forgiveness options.
View Article Sources
  1. Average Student Loan Debt by Year — Education Data Initiative
  2. Income-Driven Repayment Plan — Federal Student Aid
  3. Best Personal Loans for Students | March 2022 — SuperMoney
  4. Best Student Loan Debt Settlement Companies | March 2022 — SuperMoney
  5. The Ultimate Guide to Student Loan Refinancing — SuperMoney
  6. Lower Student Loan Interest – SuperMoney Guide to Reducing Student Loan Interest Rates — SuperMoney
  7. 2021 Personal Loans Industry Study — SuperMoney