First of all, we have to be clear about the basic requirements in detail for “what increases your total Loan balance”. Let us try to understand the loan and its conditions for repayment before borrowing the same from the lender.

We have to borrow the required amount of money from a lender. There are some basic conditions in writing between the lender and the borrower for paying the same in return. The debtor will have to pay the principal value along with interest within a stipulated period. It will attract additional charges if not paid within the time mentioned in the agreement. Which in turn the Loan Balance will be increased.

Some basic terms regarding the loan effects on the total cost of a loan. These are mentioned below–

• Principal amount: The amount of money borrowed at true interest from the lender with some terms and conditions in writing.
• Interest rate: The amount of charges calculated in percentage to be paid by the debtor to the lender due to access of funds.
• The annual rate of percentage: Total cost, which includes interest, fees plus other charges (If applicable). 
• Fees: Fees can be defined as additional charges regarding borrowing money, The origination fee, processing fee, etc are examples of such types of fees.
• Balance of the Loan: The debtor still has to pay in full to the lender is called the balance of the Loan.

What is a Loan?

There are so many lenders like corporations, government, or any financial institution. They are ready to give a sum of money in advance to the borrower with some basic conditions. The debtor, In return, agrees to return the same with a certain set of terms. Those terms may be interest, any finance charges, repayment date, and other conditions. It is called a Loan.

What do you mean by Interest?

The additional or monetary charge to pay by the borrower to the lender is called interest. It may be simple interest or compound interest. 

Know about Two Basic Types of Interest:

Simple Interest:

The most common type of interest is Simple interest. Its calculation is more easy than another rate of interest. In this category of interest, the interest is calculated only on the principal of the loan amount. It means a borrower will have to calculate the interest on the loan from the beginning, and the balance of the loan does not change with the interest. An “installment loan” falls under this category.

Compound Interest:

This type of interest is calculated on the principal plus any interest that accrues on the loan balance. Then the loan balance will be increased during loan repayment.  

Know about Two Basic Types of Interest Rates:

Fixed Rate of Interest:

The fixed rate of interest does not change throughout the stipulated period of the loan. It can also be referred to as Fixed rate loans. Having fixed interest can make things easier, as their payment usually stays the same.  

Variable Rate of Interest:

This type of rate of interest depends on some factors. In this case, interest can be increased or decreased. That’s why most of the people take the risk, as they can save money.   

Different aspects of increasing loan balance:

We all know that Interest will impact the loan amount. Generally, we expect the loan balance to go down over time after making repayment. But this is not happening at all times after paying back the money. There are seven different factors for increasing the loan balance as mentioned below–

Make late payments:

Late payment increases the loan balance. In this case, an extra fee as a penalty has to be paid with the loan amount.  

Miss payments:

In case of missed payments, interest will not be stopped. The principle value will be increased after adding this interest. As a result, the loan balance will be increased.

Pay less than the minimum due amount:

A portion of every installment is to be cleared by clearing the interest along with a portion of the principal value.  Hence, the payments by installment would not cover the interest of the loan and the principal value. Less payment than the minimum due will attract an extra fee with the loan amount. That will increase the total loan amount due.

Borrow more than income:

In some cases, the load repayment amount may be less than the interest charges. It causes the balance to rise slowly over time.

Extended payment plan:

As per the extended payment plan, the size of the loan over time will be reduced very slowly. Actually, in this plan, the loan may last for 20 years or more before paying off in full.

Although the monthly payment seems to be less, the lender will consider more interest. Which in turn increases the total balance. Moreover, the total loan balance may be increased after missing any payment extended period.

Credit Account / Revolving Credit:

With more use of a credit card, the loan balance will be higher. This happens for a reason. The monthly payment will be more after spending more. Hence the balance will be higher due to compound interest. As a result, the total loan balance amount will be increased for more accrued interest. 

Errors of lender:

The total loan balance may be increased due to the error of the lender. It may be a calculation error, wrong interest applied, not updating the principal balance, etc. Then we must contact the lender immediately to correct the error.

Tactics To Decrease Total Loan Balance Quickly:

Loan balances can be reduced through some techniques.

A debt repayment strategy can help if anyone is struggling with debt. There are some techniques to decrease the total loan balance quickly. This is required for saving the money and giving more freedom. 

More Than the Minimum Due Amount to be paid:

To decrease the loan balance, if possible, we have to pay the minimum due amount per month. Also, it can be helpful, if paying a little more than the due amount per month can help to bring down the loan balance quickly.

Make extra payments to pay the Loan early:

The repayment process can be sped up after paying extra along with the minimum due per month.  Some lenders may impose different types of penalties. We have to make sure about it before paying any extra amount.  

Refinancing of existing Loan:

Repayment can be sped up after taking the option for refinancing any debt. When a deficit merger occurs expending off numerous loans, then refinancing happens with one loan. This process will be helpful after taking a new loan to pay existing debt. Repayment will be more manageable after paying a lower rate of interest on a new loan.

Multiple consequences for defaulters:

The lender may seize the house or car after missing enough payments on secured loans. Then the borrower will be bound to sell their house or car at below-market rates. The borrower will suffer multiple consequences:

• He/she can lose his/her house or car 
• The credit score will be reduced as the lender defines the borrower as a defaulter.
• There is less chance of borrowing again from that lender. But, if by chance it happens, the lender will charge an extremely high interest rate to compensate for the higher risk of becoming default again.

Elaborate on the sense of  Negative Amortization.

Sometimes, the lender may agree to accept smaller payments than he/ she accrued in each payment period. If we continue this for months or years, and the total balance will double or triple, then this process is known as negative amortization. Because instead of gradually paying off the loan, debt keeps growing.

Conclusions:

We have to be aware in all respects before taking any type of loan from lenders. The lenders may be the private sector or the government sector. But before experiencing any bitter taste, we must check all documents and conditions by any lawyer or financial experts. Always try to understand in detail the sum of money you borrowed and what amount you have to pay per installment. Set your plan to pay the total amount smoothly within the stipulated period.

Frequently Asked Questions

What action is to be taken after seeing the loan balance does not decrease as expected?

Some precautionary measures are to be taken after seeing the loan balance does not decrease as expected.  

• First of all loan agreement is to be reviewed to know the interest rate..
• Are Any other potential fees included or not?
• To be discussed with the lender for clarification.
• All communication and payment-related information are to be recorded properly. These may be helpful for future communication.

Is there any way for loan forgiveness?

There is only one option for loan forgiveness. It is the “federal student loan forgiveness” It can be applied through the Federal Student Aid Office.

What is the Significance of interest-only payments on student loans?

Interest-only payment on student loans means to cover the interest paid during the stipulated period.  The principal balance will remain the same. It shows a longer time to pay off the federal loans. Hence,  more interest is paid throughout the loan life.

What types of student loans are there? 

• Federal student loans 
• Private student loans

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