What Can Increase Your Total Loan Balance?

If you’ve taken out a loan, you likely plan to pay it back on the schedule set by the lender and see the loan balance steadily track downward over time. But are there actions you could take that could actually increase your total loan balance?

Generally, if you make timely payments on an installment loan, like a personal or auto loan, the balance doesn’t increase over the life of the loan. However, there are certain types of loans and situations where you could see your loan balance rise. Here’s what you need to know about the three things that could increase your total loan balance.

Interest

If your loan has a fixed interest rate, it’s set for the life of the loan. However, variable interest rates can rise or fall over time, meaning if the interest rate rises quickly and you can’t cover the entire amount, it could increase your total loan balance. There are a few other ways interest can add to your loan balance. It’s worth noting that the following three concepts generally apply to federal student loans.

Capitalized interest

Interest capitalization is when unpaid interest and fees are added to the principal of a loan. This can occur after periods of forbearance, deferment or a grace period. For example, if you graduate from college with certain types of student loans and you enter a six-month post-graduation grace period, your loan accrues unpaid interest. If you fail to pay off unpaid interest before the grace period ends, it’ll be added to your total loan balance, potentially increasing your monthly payments.

Negative amortization

Negative amortization occurs when you’re making a loan payment that’s insufficient to cover the interest on the loan. If this happens, your loan balance rises. You can prevent negative amortization by covering at least the interest due on your loans each month.

Fees

When you apply for a loan, the lender may assess certain fees which could initially increase your loan balance. There are a few common types of fees.

• Origination fee: An origination fee is a one-time upfront fee and may be charged for various loan types, including mortgages, car loans and student loans. The fee is generally a percentage of the total loan balance, like .5%, and it's used to cover the costs of creating the loan, like processing your application, underwriting and other costs. With some lenders, you may be able to pay for your origination fees separately upfront. Otherwise, you can roll them into the loan, which can increase the total amount.
• Late fee: If you're late with a loan payment, the lender may issue a late fee that's a flat rate or percentage of the payment amount. This fee can increase your total loan balance.
• Missed payment fee: If your late payment turns into a missed payment, your lender may issue a fee that’s a flat rate or percentage of the missed payment amount. The fees for missed payments can increase your loan balance.
• Closing fees: Some mortgage and home equity lenders let you roll closing costs – which can include things like appraisal and title search fees – into the loan, which can increase the balance.

Taking out another loan

Certain types of loans, like a cash-out refinance, involve replacing your current loan with a new one. Sometimes, that process results in a higher total loan balance. For example, say you currently have $100,000 on your mortgage and want to take out $25,000 renovate your kitchen. With a cash-out refinance, your new total loan balance would be $125,000, plus any additional fees not paid at the time of the refinance.

How to keep your loan balance from increasing

In certain instances, like student loans that go into forbearance with capitalized interest, there isn’t much you can do to prevent your loan balance from going up. However, there are steps you can take to manage loans and keep your balance heading in the right direction. 

• Make timely payments: The best way to keep your loan balance from going up is to make timely payments. If you have an installment loan, like a student loan or auto loan, you’ll know your payment schedule when you take out the loan. Sticking to the payment schedule can help ensure you’ll pay the loan off as planned and avoid increasing the balance on the way.
• Understand your lender’s terms and fees: Read the fine print, especially as it pertains to payment terms and fees. Understand the actions (or inactions) that could result in a fee, like late or missed payments.
• Look into paying extra: If you want to decrease your loan balance quickly, you might consider making additional payments on the principal or increasing your monthly payment amount. Before you do, make sure your lender doesn’t charge prepayment penalties.
• Set up automatic payments: If you’re worried about late or missed payment fees, set up automated payments to ensure loans are paid on time. Consider setting up payments on strategic dates, like the day after you get paid, to ensure there’s enough money in your account.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.