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What Increases Your Total Loan Balance? Key Factors to Know

Capitalized interest, fees, and missed payments can quietly grow your loan balance even when you’re making regular payments.

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Updated September 30, 2025 Advertising disclosure
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Edited by John Howard
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Written by Rachel Alulis
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Key takeaways

  • Your loan balance can increase because of accrued interest, fees, additional borrowing, or negative amortization.
  • Paying extra toward the principal and avoiding penalty interest rates can lower your total loan cost.
  • Reducing your principal faster saves money on interest and shortens your repayment timeline.

When you take out a loan, you expect your balance to decrease with each payment, but sometimes it doesn’t. In fact, you might notice your total loan balance creeping up even as you make regular payments.

No one wants to owe more than they have to or stay in debt for longer than necessary. Understanding what causes your loan balance to grow may help you avoid costly situations and get you out of debt faster.

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Factors that can increase your loan balance

Keeping your loan balance under control requires understanding the many ways it can rise, sometimes unexpectedly. Below are the key factors that can increase your total loan balance and what they mean for your repayment strategy.

Variable or adjustable interest rates

Many loans have fixed interest rates that do not change. Some lenders offer loans with variable or adjustable rates that fluctuate in response to changes in the financial market.

Lenders choose an industry rate to watch, such as the prime rate, and tie your interest rate to that benchmark. When the benchmark rate goes up, your interest rate, and therefore the amount of interest charged each month, also rises. The loan balance itself does not increase, but the amount you have to pay to get rid of the debt does.

If you are only making minimum payments, you may not be paying enough to cover the higher interest charges. In this case, your loan balance can grow. This is common with adjustable-rate mortgages, private student loans, and some personal loans.

Variable interest rate loans can be attractive when the prime rate is low. The problem is that when the rates increase, you may end up with high-interest debt.

Negative amortization

Negative amortization occurs when your monthly payment is too small to cover the interest that accrues. The lender adds the unpaid interest to your principal, causing your balance to increase instead of decrease.

Most loans are fully-amortizing. As long as you make your monthly payments, you will fully pay off the loan at the end of its term. Negative amortization is more common with specific student loan repayment plans. You can also find it with adjustable-rate mortgages, where borrowers can select a lower minimum payment.

A low minimum payment can fit easily into your budget, but it is not worth the cost if it doesn’t cover the interest. Otherwise, you’ll end up paying significantly more interest over the life of the loan.

Penalty interest rates

Some lenders impose a penalty interest rate if you miss a payment or violate other terms of your loan agreement. These penalty rates are often much higher than your standard interest rate. Once applied, they can lead to faster interest accrual and a higher balance.

In some cases, penalty interest rates remain in effect until you make several consecutive on-time payments. It can take months to return to your original lower rate.

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Forbearance or deferment

Forbearance or deferment is when your lender agrees to let you pause or reduce payments for a certain amount of time. While this can provide temporary relief, most lenders still charge interest.

When your payment pause ends, the lender may add the unpaid interest and fees to the loan principal. This is called interest capitalization. As a result, you have a larger total loan balance and potentially higher monthly payments.

The exception is if your loan type offers subsidized interest during this period or a pause in interest. Some federal student loans provide this benefit.

You can avoid capitalized interest by paying the accrued interest each month during deferment or forbearance. You don’t have to make the entire payment, just the interest you accrue.

Fees

Fees are another way your loan balance can grow. Common fees include:

Origination fee: An origination fee is a one-time up-front fee used to cover the cost of processing the loan. It ranges from 0.5% to 12% of your loan amount. Some lenders make you pay fees separately at the start. Others add the fee to your loan amount, which increases what you owe.

Late fee: When you miss a payment due date, most lenders charge a late fee that is a flat rate or a percentage of the loan amount. The lender may add the cost to your balance, causing it to incur interest.

Closing fee: Mortgages and home equity loans have closing fees, which include items like the appraisal and title search fees. Lenders may roll these fees into your loan, increasing the balance.

Over time, even relatively small fees can add up, especially if they are subject to interest.

Additional borrowing

Taking out additional money against an existing credit line or loan will obviously increase your total balance. Adding to your balance is common with . HELOCs let you continuously borrow up to your limit with interest-only payments. The more you withdraw, the higher your balance will be.

Additional borrowing can also occur with installment loans. Some lenders allow borrowers to do a cash-out refinance or take out a top-up loan that increases the total amount owed.

How to reduce your total loan costs

In certain instances, there isn’t much you can do to prevent your loan balance from increasing. Generally, there are proactive steps you can take to reduce the overall cost of borrowing.

Set up automatic payments

One of the easiest ways to keep your loan costs low is to set up automatic payments. Many lenders offer a small interest rate discount – often around 0.25% – if you enroll in autopay.

Auto pay not only saves you money but also ensures that you never miss a payment. No missed payments means you can avoid late fees and penalty interest rates. Autopay can be especially helpful for busy borrowers who want a simple way to stay current on multiple loans.

Pay extra when you can

Paying only the minimum each month may keep your account in good standing, but it won’t help you save on interest. The faster you pay down your principal, the less interest you will owe over time.

Even small extra payments can make a difference, especially on high-interest loans. You can add a fixed extra amount to each monthly payment or make additional payments whenever you have extra funds.

If you’re making an additional payment, contact your lender. Ask them to apply the money towards the principal balance rather than future payments. That way, you’ll reduce your principal faster and pay less interest.

Consider a lump sum payment

If you receive a tax refund, bonus, or other windfall, consider using part of it to make a lump sum payment toward your loan. A large principal reduction can significantly cut down the total interest you’ll pay over the life of the loan.

Before making a lump sum payment, check whether your loan has any prepayment penalties. Most lenders do not impose this charge, but it’s always wise to confirm.

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Take out a debt consolidation loan

A allows you to combine several high-interest debts into one fixed monthly payment. The new loan typically has a lower interest rate. It’ll reduce the amount of interest you pay overall and help you pay off your balance faster.

Just make sure to compare loan offers carefully and avoid taking on new debt after you consolidate your balances.

Negotiate with your creditors

You may be able to lower your costs simply by asking. Contact your lender and request a lower interest rate. Some lenders are willing to work with borrowers to adjust terms, remove fees, or temporarily reduce interest charges. They are more willing to if you have a good payment history, an improved credit score, or are facing a genuine financial hardship.

Refinance for better terms

Refinancing is another way to reduce your loan costs if you get a good deal. When you refinance, you take out a new loan to pay off your existing loan. The new loan should have a lower interest rate or .

Refinancing can lower your monthly payment, shorten your loan term, and reduce the interest you pay. Check how much you’ll save, as loans often come with fees that can reduce savings.

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Large loan balances hurt your financial future

Carrying a large loan balance doesn’t just cost you more in interest; it can hold you back from reaching your financial goals. High monthly payments eat into your budget, leaving less money for savings, investments, and everyday expenses. A high debt-to-income ratio can also make it harder to qualify for new credit.

The stress of a growing balance can also impact your mental well-being, making it harder to feel in control of your money. Reducing your loan balance as quickly as possible is one of the smartest moves you can make for your long-term financial health.

Frequently asked questions

1. Why is my current balance higher than what I borrowed?

Your current balance may be higher due to accrued interest, capitalized interest after deferment, or negative amortization. If you’ve missed payments, your lender may charge late fees and impose a penalty interest rate. A higher interest rate and additional fees will increase the amount you owe.

2. Can missing a payment increase my loan balance?

Yes, since interest continues to accrue on your unpaid balance. Your lender may charge late fees and impose a penalty interest rate. The penalty rate will cause your loan to accrue interest at a higher rate going forward. Over time, this can make your total loan balance grow faster than expected.

3. Is it worth paying extra on my loan?

In most cases, paying extra helps reduce your principal faster, which lowers the total interest you’ll pay over the life of the loan. Even small additional payments can save you money and help you become debt-free sooner. Just ensure your lender applies the extra amount toward the principal, not future scheduled payments.

4. Is it bad to pay off a loan too quickly?

usually saves money on interest. The exception is if the loan has a prepayment penalty. Then, the penalty for paying off the loan early may offset your savings.

5. Does making payments every day decrease your loan balance?

Daily payments can reduce your balance faster because they lower the principal before more interest accrues. Check with your lender to confirm that they will add the payments to your principal. Also, ask how they process payments, as some only process them once a month.

Bottom line

Loans can provide the funds you need for higher education, home repairs, debt consolidation, and more. While valuable financial tools, you have to handle them responsibly.

The key is only to take out what you can realistically afford to repay. A manageable loan balance keeps your monthly payments within budget and prevents your debt from spiraling.

Once you have a loan, commit to paying as much as you can each month. The more you can pay, the faster you’ll reduce the principal and prevent interest from piling up.

No one wants their loan balances to increase. As long as you are consistent with your payments and they cover the interest, you’ll pay off your loan sooner rather than later.

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About the author

Author Rachel Alulis Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor's credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor's degree in journalism and an MBA.

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