What increases your total loan balance?

You’re paying off a loan and it doesn’t feel like you’re making any progress. So you check your balance and find an unhappy surprise. The balance has actually gone up even though you’ve been making payments. Most of the time, loan balances go down over time. But sometimes, they can go up. 

Several factors could drive up your total loan balance, from making payments that are too small to pausing your loan payments. Understanding these factors could help you avoid extra costs when paying off a loan—it could help you shut the door on debt sooner.

Whether you have a personal loan, a student loan, or another kind of loan, your goal is probably to pay it off as quickly as possible. The more you know about what increases your total loan balance, the easier that goal becomes. 

Why your loan balance can increase

Let’s go through some of the things that increase your total loan balance so you can potentially avoid having this happen in the future. 

1. Negative amortization

Negative amortization loans allow you to choose how much you’ll pay each month. You could make very small minimum payments that don’t even cover the interest due. When you only pay that minimum, though, the lender adds any unpaid interest to your balance. Then you’re charged interest on the new, higher balance. That’s called negative amortization. 

Even though you’re making monthly payments, the result is that the amount you owe goes up instead of down. 

Most loans are structured to be fully amortizing. That’s a fancy way of saying that each payment is designed to cover both interest and principal, so when the loan term ends, you’ve paid off the balance. Negative amortization is legal, but it’s not common because it’s risky for borrowers and lenders. 

2. Forbearance or deferment

A forbearance or deferment means your lender has agreed to let you pause or reduce payments for a while. Mortgage forbearance typically lasts one to six months. That applies to personal loans, too, helping you manage your personal loan finances. Student loans can sometimes be paused for multiple years to help you manage student loan debt. 

Most loans still charge interest during a payment pause. (Some federal student loans pause interest during deferment.) If your loan continues to accrue interest, you’ll owe more when your payment pause ends. And as your loan balance increases, your monthly interest goes up, too. A good strategy is to pay your accrued interest each month, even if you can’t make your entire payment during a deferment. 

Achieve tip: In most cases, you’ll need to catch up on any payments that were skipped or reduced during forbearance or deferment. That means when the pause ends, you have to pay extra until you make up for those missed payments. Student loans are the exception. You generally aren't required to catch up after a student loan pause. 

3. Additional borrowing 

Sometimes, you’re allowed to borrow more money after you first borrow—for instance, when you take out a home equity line of credit (or HELOC). A HELOC typically allows you to borrow less than your full credit limit. You can keep your line of credit partially unused and reserve it for emergencies, or you can borrow against it for almost any purpose. Borrowing more, however, always increases your total loan balance. 

4. Late fees

Missing a payment due date often triggers a late fee. You can cover the fee when you make your next payment, or it'll be added to the balance that you owe. If your account is in good standing and the late payment is an isolated mistake, you may be able to persuade the lender to waive the fee. 

Why your monthly payment could increase

If you’re paying off a loan, you may find yourself wondering: Why did my payment go up? Here are some reasons this could happen.

1. Variable or adjustable interest rate

Many debts have interest rates that can go up or down as financial markets change. Credit card issuers generally call these rates variable, while mortgage lenders call them adjustable. 

In both cases, the lender picks a number from the financial world to follow (called an index or a benchmark). If that number goes up or down, your loan’s interest rate and monthly payment could also go up or down.

If your interest rate goes up—but you take the same amount of time to pay off your debt—you end up paying more overall. The amount you borrowed stays the same, but a higher rate means it costs you more in fees to borrow it.

2. Penalty interest rates

Missing payments without a lender’s approval can cost more than a formal forbearance or deferment. That’s because the lender may charge you a penalty interest rate on top of any late fees. A penalty rate is when your rate goes up as a result of violating the terms of your loan, like when you miss a payment or have a payment returned for insufficient funds.

Penalty interest rates are higher than your regular rate, which increases what you have to pay. Technically, higher interest increases your cost to borrow but not your loan balance.

3. Taxes and insurance

Sometimes, your mortgage payment includes an amount for property taxes and homeowners insurance. Your lender collects this from you each month and then pays those bills when they come due. This is called escrow or impounding.

If your mortgage has impounds, your payment will increase if those costs go up. Higher taxes or insurance costs don’t make your loan balance increase, but they do increase what you have to pay.

What’s next?

If your loan balance is going up (or not going down the way you think it should), give your lender a call to find out why. If you have a negatively amortizing loan or a debt with a high interest rate, start looking for ways to bring the cost down and make steady progress on paying it off. Here are some ideas to consider. 

• Take out a lower-interest loan to consolidate debt

• Refinance to a new loan with better terms 

• Negotiate your debts with your creditors if you can’t afford to pay them off

• Create a budget that helps you put more money toward debt repayment

• Talk to a debt expert about your situation and what options might make sense.