Loan Balance

Loan Balance

Loan balance refers to the amount of money you have to repay on your loan. All loans will have a loan balance until you’ve paid off the loan in full. Usually this balance will show the total owed, including interest and principal. 

What Is Loan Balance?

Loan Balance refers to the sum of money that the borrower has yet to repay to the lender (an individual, a financial institution such as a bank, or a private company). Upon taking out a loan, the borrower must pay off their debt, which consists of the principal and the interest. In an ideal situation, the borrower’s loan balance will decrease over time through installments until it reaches zero, meaning the loan was repaid in full.

What Are the Elements of a Loan Balance Sheet?

The loan balance sheet represents your loan balance, which depends on two key elements: the principal sum and the interest charges. The main sum—or the principal—is the original borrowed amount. It does not include the lender’s interest charges or any other fees.

The interest is the amount of money that the borrower must pay to the lender in addition to repaying the principal. It serves as an incentive for the lender to lend the money to the borrower. The total interest depends on the interest rate, which is a fraction of the main borrowed sum (the principal) and is influenced by multiple other factors (the length of the loan, how risky the loans are for the lender, etc.).

As an example, a 15% interest rate on a $3000 principal sum would amount to $450. Interest can be simple or compound. Any interest that is compounding accumulates charges on already-accrued interest (meaning you will pay interest on your interest.)

The principal sum and the interest charges are two important figures that will influence the balance of your loan. If they’re not equal to zero, this means you have an outstanding loan balance that still needs to be repaid. 

What Does Outstanding Loan Balance Mean?

The outstanding loan balance is simply the amount you are yet to repay on the loan, whether through clearing unpaid loan fees or with future installments. It consists of the outstanding principal (the remaining principal to be repaid) and the outstanding interest (the remaining interest).

Note that when repaying your loan through installments, not covering your outstanding loan balance may result in penalties from the lender, such as foreclosure or car repossession. That’s why you’ll want to make sure no outstanding balance remains on your account, to avoid added financial charges.

It’s a good recommendation to calculate the balances of your loan to verify your lender has not made any errors on your loan balance sheet. Keep in mind that loan balances are not calculated by subtracting the repaid sum from the principal. Other important parameters (interest rate, loan type, amortization schedule, other fees) weigh in on the equation too. 

When calculating an installment for your loans, you are better off using an online calculator or inquiring about your actual payoff amount from the lender.

What Is the Payoff Amount and How Does It Differ from Loan Balance?

If you want to pay off your loan earlier than expected, you may discover that the payoff (the actual amount of debt) is greater than the balance of your loan. You will need to contact your lender to get the accurate sum. This should not come as a surprise since the payoff refers not only to the loan balance on the day of the request but also includes other fees such as unpaid charges, prepayment penalties, and residual interest.

How Does Loan Balance Differ from Account Balance?

It is important to note that these two terms have different meanings. The loan balance refers to the amount that a borrower owes to another party. You don’t want to see numbers rising on your loan balance sheet. 

However, an account balance refers to the amount of money currently in your possession. It’s the amount of money you have in your checking or savings account. 

How Do I Pay Off My Loan Balance?

As mentioned, you will want to keep paying your loan installments. Not doing so may result in penalties from your lender. Try to reduce your loan balance to zero and cover all outstanding loan payments. Avoid paying only interest charges or rolling over your loan (paying a fee to extend the life of the loan) to keep the costs as low as possible. This way, you will also ensure a good credit rating because of healthy financial habits.

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