What Increases Your Total Loan Balance? (8 Common Reasons)

Has your loan balance gone up and you aren't sure why? Find out what increases your total loan balance in this article and solutions that can help.

You’ve been trying to manage your debt. While reviewing the numbers, you suddenly notice that your total loan balance has increased. That’s not what anyone wants to see. It’s probably left you worried that your debt may be getting out of control or that you may have accidentally mismanaged your payments. 

In this article, we’ll break down 8 common reasons why your total loan balance may have gone up. This is especially a common thing that can happen with student loans, but some of these factors can also apply to other types of loans or even credit card debt

After that, we’ll also cover ways you can reduce your total loan balance and prevent any unforeseen increases from happening. Stick around until the end for all the details. 

1. Compound Interest

One of the biggest factors in total loan balance increases is compound interest. Since interest rates operate on a percentage system, they can increase exponentially if you aren’t paying off enough of your loan balance each month. This can be common if you make small, flat payments that don’t account for the interest rate. 

For instance, let’s say you were on a 20% APR. If you weren’t paying enough, suddenly, you could see your balance start to look like this:

MonthStarting BalancePaymentInterest AccruedEnding Balance
January$2,500$35$40.92$2,505.92
February$2,505.92$35$41.02$2,511.94
March$2,511.94$35$41.12$2,518.06
April$2,518.06$35$41.22$2,524.28
May$2,524.28$35$41.32$2,530.60

As you can see, when this happens, the total loan balance at the end of each month can keep going up and up. That’s why managing your payments effectively is essential. 

2. Late Payments

When you make a late payment, it can also increase your total loan balance. The main reason for that is because of late fees that will occur with most types of loans. 

The way that would work out is like this:

Your minimum payment is $35. However, you forget to send it in on time. Then, once you finally send the payment through, you get a $20 late fee added to your account along with the $22 in interest you accrued that month. Suddenly, even though you made the minimum payment, your loan balance still went up by $7. 

If you make late payments frequently, this could cause your loan balance to go up a significant amount over time. 

3. Paying Less Than the Minimum Amount Due

Paying less than the minimum amount due can also get you in trouble quickly with an increasing loan balance. 

You still get a late fee when you pay less than the minimum since you didn’t make a full payment. Plus, most minimum payments are designed to help you stay ahead of accruing interest. So, when you pay less, your loan balance will shoot up even more. 

Here’s how that scenario would look:

Your minimum payment is $80. However, you ran into some extra expenses this month and can only afford to pay $50. Your interest on the month’s balance ends up being $60. Plus, you get a late fee of $25 tacked on for not making a full payment. All of that leads to an increase of $35 on your loan balance for the month. 

4. Revolving Credit

Another issue with a rising balance can be revolving credit. That’s when you spend money on credit cards each month and don’t pay it all off. Or, in terms of loans, it could mean that you’re taking out loans frequently. Either way, it can add up quickly, even when making minimum payments on time. 

5. Income-Based Payment Plans

When dealing with student loans, you also have some that will be structured as income-based plans. The idea behind this structure is to ease the burden on new graduates who may start at lower salaries after college. 

However, interest rates often remain the same throughout these plans, so it causes the loan balance to continually increase if you only make the required minimum payment, which is usually based on 10% of your monthly income for most income-based options. 

Therefore, if you have income-based student loan payments, consider paying more than the minimum if you have the means to do so to prevent the loan balance from increasing and paying more over time. 

6. Unsubsidized Loans

Another issue with student loans can be when they’re unsubsidized. Typically, you’ll get an unsubsidized loan when you’re deemed to be “not financially in need,” are in a graduate or post-graduate program, or if you take out a private loan. 

The main issue with unsubsidized loans is that students who get a loan won’t have to make payments when they’re in college but will still be accruing interest on that loan balance. 

For instance, let’s say you received a loan of $5,500 in the first semester of your freshman year in college, with an APR of 7%. After your freshman year, that loan balance would already be at $5,885 (a $385 increase). And by the time you graduate, it would be $7,209.38 (a $1,709.38 increase). 

Not to mention, that’s just for one semester of school. If you took out similar unsubsidized loans each semester you’re in school and didn’t make any payments – you’re looking at some pretty substantial interest racking up over that time. 

7. Errors

If you’ve made it this far in the list and still haven’t spotted the potential problem driving up your total loan balance, it may have been a simple processing error. Loan companies aren’t perfect and make mistakes, too. 

Review your payment history to see if you made all your payments on time and paid the right amount – all the basics. If it appears like you have everything in line with how it should be, contact your loan provider. They can give you some additional insights and correct any errors that may have occurred. 

8. Extended Payment Plans

Lastly, extended payment plans can also lead to increasing loan balances. 

For one, while smaller payments over the long term can help, it also increases your chances that you could accidentally miss a payment or pay late at some point during that time. 

It’s also crucial to make sure you don’t have tons of revolving debt during this time. The ongoing accrual of debt will continue to drive up your loan balance. 

If you need assistance planning to spend within your means, check out our free monthly budget template

How To Reduce Your Total Loan Balance

How To Reduce Your Total Loan Balance

Now that you know everything that can cause your loan balance to go up, let’s review how you can make efforts to reduce it. 

Pay More Than the Minimum or Make Extra Payments

As mentioned earlier, if your loan balance is increasing, the most common cause is compound interest. Making bigger payments is the best way to reduce compound interest accruing each month. 

If you can pay more than the minimum each month or even make the minimum payment once every 2 weeks (or something along those lines), you’ll start to get on a better track toward paying down that debt. 

For instance, if you made it your goal to pay double the minimum payment each month, you’d pay off that loan nearly twice as fast. It could be as simple as skipping a couple of expensive meals out and canceling some subscriptions you don’t use to have an extra $100 monthly to pay down your loan. 

Consolidate or Refinance Your Debt

When debt is too hard to manage, or you have loans from many organizations with varying interest rates, it can be helpful to consider consolidation or refinancing. Debt consolidation firms may be able to help you lower interest rates to pay off your debt more efficiently. 

When choosing a consolidation company, just make sure they’re BBB accredited and belong to the National Trade Association. This will help you pick a reputable company. You should also meet with an advisor before agreeing to any deals to ensure the numbers make sense for your financial needs. 

Pay Back Your Highest Interest or Most Expensive Loans First

Another method that can help is what’s called the debt avalanche method. This method involves making minimum payments on all your credit and loan accounts and using any extra money you have to pay off your highest interest or highest balance loans first. 

Once you pay those off, it significantly lowers the compound interest you’re accruing each month, helping you decrease the chances that your total loan balance will increase. 

How to Prevent Loan Balance Increases in the First Place

How to Prevent Loan Balance Increases in the First Place

There are also some strategies you can put in place to prevent total loan balance increases in the first place. 

Only Accept Subsidized Student Loans

One of the best ways to prevent loan balance increases on student loans is to only choose subsidized loans. Those would be the federal loans you’re offered when filling out the FAFSA application. Usually, somewhere in the details, it’ll say whether it is subsidized or unsubsidized so you can make an informed decision before accepting a loan. 

As mentioned earlier, this is a good idea since subsidized loans won’t accrue interest while you’re in school. 

Make Interest-Only Payments While You’re in School

If you don’t qualify for any subsidized loans, you can still make efforts to avoid drastic increases in your loan balance while in school. 

For instance, making at least interest-only payments during that time is a good idea. So, if you accrue $20 in interest each month, you would want to make at least a $20 payment on your loan. It’ll help avoid having that $20 in interest turn into $30 over time, making your loan harder to pay off. 

Make Efforts to Limit How Much You Borrow

You can also make efforts to limit how much you borrow from loan providers. For example, if you’re in college, you could consider options like work-study programs or getting a part-time job to give you some money to put toward your tuition. It’s a bit of extra work when you’re in college, but it’ll be worth it to avoid long-term payments on debt. 

The same can be said if you’re not a student and just have loans that are adding up. You could take on a side hustle or simply make efforts to budget and reduce your monthly expenses to have more money to put toward paying off your loan. 

You Can Manage an Increasing Loan Balance and Pay Off Debt Successfully

When your loan balance is going up and up each month, it can feel like things are getting out of hand, and there is no hope. However, you can manage and pay off debt to avoid the situation getting out of control. 

Try some of the tips in this article and review your current financial situation to see what small efforts you can make to get back on the right track. Every small step helps and will allow you to build positive financial habits over time. You’ve got this! 

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