Budgeting Loans

What Increases Your Total Loan Balance?

Most people understand that loans come with interest rates and that you pay that back along with the principal. However, you may notice that your loan balance increases and may be curious and alarmed about why that is happening. There are a few different reasons why your loan balance can increase, and it will be important to know why. This article will focus primarily on student loans because these types of loans may change the most throughout their life; however, most of the variables impact other kinds of loans, such as a No Credit Check Loan, and their balances as well. Below you will find more information on factors that increase your total loan balance. 

Defining Capitalization When It Comes to Loans 

Capitalization is the accruing of interest that is added to the loan balance. With student loans, this can happen if there is a pause in required payments. For other loan options like a credit card cash advance, for example, the interest will start accruing interest immediately after, which will then be added to the payment—the capitalization process.  

Learning More About Interest Rates

Interest can come in different forms, which will also impact how a loan balance changes. Here is a breakdown of interest rates: 

The Different Types of Interest 

There are two basic types of interest rates that you should know about:  

Fixed Interest Rates

Fixed interest rates do not change throughout the loan period. You’ll find fixed interest with most loans, including installment and personal loans, which are sometimes referred to as fixed-rate loans. Some people find that having fixed interest can make things easier, as their payment usually stays the same. Once you learn more about how loan balances can change, you’ll realize that is not always the case.

Variable Interest Rates

Variable interest rates change throughout loan repayment, depending on a few factors. With a variable rate, the interest can increase or decrease, and many people take the risk because they could potentially save money.   

The Differences in Interest Accumulation

The way that interest is collected also impacts your loan balance; here are the two major ways that interest is collected with a loan.

Compounding Interest Rates

Compounding interest is calculated on top of the principal and any interest that accrues on the loan balance. Because of this change, your loan balance may increase during loan repayment. You’ll see compounding interest with credit cards. Because compounding interest such as credit card interest can add up quickly, it is important to learn more about credit card interest rates and APRs before you decide on using them for your expenses.  

Simple Interest 

Simple interest is the most common kind of interest calculation you will find with a loan. With simple interest, interest is only calculated on the principal loan amount. This means that a borrower will be able to calculate loan interest from the get go, and the loan balance should not change due to the interest. One common example of simple interest is installment loans. 

Because interest rates have such a large impact on your loan balance, it is important to educate yourself on how interest works.

More Information on What Increases Your Total Loan Balance

Interest will definitely impact your loan balance; however, that isn’t the only variable that does. Here are some other factors that may affect your loan balance:

Late Payments or Deferred Payments

Late payments or deferred payments will also increase your loan balance. When you miss a loan payment, there will likely be a fee that you’ll have to pay, which will be added to your loan. With some loans like student loans, you can defer payments, which means a grace period, but interest will still accumulate during that time. 

Paying Less Than the Minimum Amount Due

Every loan will have a minimum amount due as your monthly payment. If you pay less than that minimum balance, you may be charged a fee, which will then be added to your loan balance.

Using Your Credit Account (For Revolving Credit)

When it comes to credit cards or other types of revolving credit, the more you use it, the higher your loan balance will be. This occurs for a few different reasons. The more you spend, the higher your monthly payment will be. And because the interest is compounding, the higher the balance, the more interest charged. 

The Payment Plan, Especially for Federal Student Loans

Generally, two loans with the same principal and interest but different repayment terms can still have different loan balances. The loan with the more extended repayment may mean paying more. This is especially important with federal student loans. Here are some payment plans with student loan debt you will likely come across: 

A Standard Repayment Plan 

With a standard repayment plan, you’ll make fixed payments with standard loans for up to 10 years and between 10 and 30 years for consolidation loans. 

Pay as You Earn (PAYE)

The pay-as-you-earn plan takes 10% of your discretionary income but never exceeds the standard repayment plan minimum.

Graduated Repayment Plan

With the graduated repayment plan, your monthly payments will start lower at first and then usually increase every two years. While still making it possible to repay the loan within 10 years, 10–30 for consolidation loans.  

Revised Pay As You Earn Repayment Plan (REPAYE)

This plan offers similar repayment to the PAYE plan, except payments are recalculated each year which will be based on your income and family size. Your loans may be forgiven if you haven’t repaid your loan in 20 years (undergraduate) or 25 years (graduate). This includes accrued interest or unpaid interest. With this, you pay more over time than a PAYE or standard plan, but your student loan payments may be more manageable. 

Income-Based Repayment Plan (IBR)

Income-based repayment plans, also called income-driven repayment plans, will consider your discretionary income for the monthly loan payment, which will never exceed either 10 or 15 percent of that income. These payments will never exceed the 10-year standard repayment plan. Payments are recalculated every year based on income and family size. 

Income-Contingent Repayment Plan (ICR)

With ICR, your monthly payments will either be 20% of your discretionary income or the amount you would pay on a 12-year repayment plan based on your current income—whichever option is the less. After 25 years, if there is any student loan balance left over, it will be forgiven. 

Income-Sensitive Repayment Plan

If federal student loan borrowers have an income-sensitive repayment plan, they will have 15 years for loan repayment, and monthly payments will also be based on income. 

And so, if you have federal student loans and change your repayment plan, you may increase your total student loan balance. While private student loans don’t have this much flexibility. Instead, private student loans will be impacted by the same factors as standard loans, as they share more similarities.


Sometimes errors can also happen with your lender causing your loan balance to go up. Some common errors include calculation errors, principal balance not being updated, the wrong interest rate applied, etc. If there are any loan errors, you should contact your lender immediately, and those errors should be corrected.

How To Decrease Your Loan Balance Quickly 

Paying off any loan balance quickly will help you save money, and being debt free can help your financial health and give you more freedom. Here are some strategies to help you decrease your loan balance quickly: 

Pay More Than the Minimum Amount Due

If possible, paying more than the minimum amount due each month is a practical way to decrease your loan balance. Even paying a little more each month can really help bring down that loan balance faster. 

Pay Your Loan Early

Making some extra payments can speed up the repayment process. However, keep in mind that some lenders have prepayment penalties, so make sure you know about that before making any extra payments. 

Refinance or Consolidate Existing Loans

Refinancing or consolidating debt can definitely help speed up repayment. Refinancing occurs with one loan, while debt consolidation occurs when paying off multiple loans. With this process, you will take out a new loan to pay off the existing debt. Ideally, the new loan will have lower interest rates and more manageable repayment. 

Consider a Debt Repayment Strategy

If you are struggling with debt, then a debt repayment strategy can really help! Here are some common methods that people use to help speed up their repayment:

  • Budgeting — budgeting is a tool that can help you manage your money to reach your money goals. And if your goal is to prioritize debt payments, then you can definitely have your budget targeted towards that. Budgeting can be helpful because it helps create a plan and accountability. 
  • The avalanche method — The avalanche method involves prioritizing the highest-interest debt first while making all the minimum payments on your other debts. Once you pay off your highest-interest debt, you can move to your next highest-interest debt and so forth.  
  • The snowball method — The snowball method involves paying your highest loan balance first while making your minimum payments on your other debts. 
  • Getting debt counseling — If your debt is highly unmanageable, you should consider getting debt counseling. These financial experts can help you manage your budget  to optimize debt repayment.