In this article, we’re looking at what increases total loan balance for individuals, specifically in the United States.
This information will be relevant for anyone with an outstanding personal or business loan, credit card balance, or other credit product from their financial institution.
This article is part of our free series on credit card basics, including how to get a credit card with an ITIN number, which you can access by clicking here.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Increases Total Loan Balance?
- How Can Loan Interest Impact Your Loan Balance?
- What Makes Your Loans Balance Go Up?
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
What Increases Total Loan Balance?
Total loan balance increases when an individual uses more of the credit available to them through the loan. This can happen in the case of both personal and business loans, credit cards, lines of credit, and other credit products that are available to them or their company through a financial institution.
Importantly, loan balance specifically refers to the principal of the loan and not the interest. Therefore, the total amount that a borrower has to pay is the combined total of the loan balance and the interest, otherwise known as the payoff amount.
Most banks generate their revenue similar to how credit card companies make money and that is through banking activities, cardholder fees, and of course interest charges.
Before diving in any further, if this is your first time visiting GlobalBanks, don’t forget to download your FREE US Banking Starter Guide. It’s designed to help non-residents with opening bank accounts at top financial institutions in the US.
How Can Loan Interest Impact Your Loan Balance?
Loan interest can impact your loan balance because even when you make your scheduled payments, part of the payment goes toward interest. This is especially true at the beginning of a repayment period when a larger portion of your loan payment is contributing to the interest portion of your loan instead of the loan balance.
Over time, as you continue to pay down your loan, a smaller amount of your loan payment contributes toward the interest and a larger amount contributes toward the loan balance.
What Makes Your Loan Balance Go Up?
As mentioned above, your loan balance will go up over time when you use more of the funds available through the loan or credit product. Additionally, it’s important to note that the accrued interest and late payments will force the total payment amount (loan balance + interest) to go up if you miss scheduled payments, that’s why it’s important to understand your credit card closing date.
Delay in Paying Loans Back
Delays in paying loans back can also increase the total loan balance. Depending on the terms of your loan, this could result in loan balance interest capitalization, which refers to accrued interest being added to the total loan balance, which will incur interest charges in the future.
Choosing an Extended Loan Payment Plan
Choosing an extended loan payment plan results in lower scheduled payment amounts but the loan balance is paid back over a longer period of time. So, for example, in the case of a personal loan, you would need to decide if you prefer lower monthly payments or the loan balance paid sooner.
Frequently Asked Questions
Below are three of the most common questions that we receive from people looking into what increases total loan balance. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
How Can You Reduce Total Loan Cost?
You can reduce total loan costs by increasing the amount that you pay each month. In other words, instead of meeting the minimum monthly payments, you can pay above the minimum required amount and this will reduce the total loan cost. That said, certain loan products have restrictions on repayment amounts. So, unless you have an unsecured loan with flexible repayment terms like a credit card, you should check the terms and conditions of your loan before deciding how much to repay.
What Increases Your Total Loan Balance Interest Capitalization?
Loan balance interest capitalization occurs when accrued interest is added to the total loan balance (principal) and the financial institution then charges interest on the total payment amount (principal and accrued interest). This happens during periods when interest is being charged but not repaid.
What Decreases Your Loan Balance?
Your loan balance decreases when you pay down the principal amount of the original loan. However, this requires the borrower to pay both the principal and the interest in accordance with the repayment terms and schedule. When you start repaying the loan, a larger portion of the payment goes towards interest, though this decreases over time and more of the principal is paid instead.
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