If you’re a student loan borrower, you know that your balance can get out of hand in a hurry. While late fees and missed payments often work as the reason, there are a lot of things that can cause your loan balance to go up.
The good news is that there are things you can do to help your debt go down. Learn what increases your total loan balance early on, and you’ll save yourself some cash down the road.
Interest
Interest is the price you pay to borrow money or the amount of money that you receive when you lend it. It’s a common way to finance goods and services and is used by lenders in a wide range of lending products, including credit cards, personal loans, car loans, mortgages and even savings accounts.
When you borrow money, you agree to pay an interest rate – this is an annual percentage of the principal amount that you owe on the loan. Lenders typically charge a fixed or variable interest rate, and this can change over time.
In general, the higher the interest rate you pay on your loans, the more you’ll owe in the end. This is why it’s so important to make your repayments on time, as this will help you keep your total loan balance low.
It also makes sense to keep your monthly payments low, especially if you have a higher debt-to-income ratio. Lower payments can save you a lot of money over the life of your loan and may make it easier for you to repay it on time.
The total amount that you owe on your loans will increase over time because of interest compounding. This is called interest capitalization, and it can lead to exponential increases in your loan balance.
Late fees
Late fees are charges that are applied to a loan, credit card or other financial agreement that is not paid on time. These fees are outlined in the contract or agreement and must be notified to the borrower in writing by the lender.
While late fees encourage borrowers to make their payments on time, they can also be harmful for consumers who struggle with their finances. They can lead to higher interest rates, lower credit scores and loss of rewards, which can make it difficult for borrowers to manage their money.
Fortunately, lenders typically are required to waive these fees in the event of an emergency such as job loss or medical issues. However, the more frequently a consumer misses their payments, the greater the impact they can have on their credit.
A client’s on-time payment history makes up about 35% of their FICO score, so it’s important to be proactive about making all required payments in a timely manner. It’s best to pay your credit card bill online, by telephone or in person at least a few days before the due date.
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If you are a business that receives late invoices from clients, it’s critical to create a late fee policy. This policy should be included on all invoices, and it’s important for clients to know it before they sign any agreements with your company.
Deferment or forbearance
When your income is temporarily too low to meet your loan payments, there are some repayment relief options you can use. These include deferment or forbearance, but there are a few things you should know about them.
Deferment and forbearance can help you get through a temporary financial crisis without losing your credit score or defaulting on your loans. However, both can add interest to your balance and increase the amount you owe in the long run.
Federal student loan borrowers can request a deferment or forbearance when they are having trouble meeting their monthly payments. This may occur when you lose your job, have medical bills that exceed your budget or get hit with another unexpected expense.
For example, if you had $10,000 in student loans with an interest rate of 1% and you were in forbearance for 12 months, your total debt would grow to $252,500 because of the added interest.
That’s because the interest that accrues during your deferment or forbearance period is capitalized. This means it’s added to the principal of your loan, so it will continue to compound and build up until you pay off your balance.
Automatic recurring payments
Automatic recurring payments, also called subscription payments, are when customers authorize a merchant to charge their credit card or electronic wallet repeatedly for goods or services. They are a great way to create predictable revenue streams, save time for your business, and help you retain more customers.
Automated recurring payments are popular for paying bills, such as monthly credit card bills, utility bills and mortgage payments. They are also used for subscription services, like gym memberships, curated subscription boxes and gated digital content.
Some customers prefer to use a debit or credit card for these automatic payments, but there are other options available. Some banks offer a bill-pay service that allows you to set up automatic payments through your bank account on a recurring basis.
If you do sign up for an automatic payment, make sure to keep track of your total loan balance so you don’t run out of money when the payment is due. You may be charged insufficient funds or overdraft fees if you don’t have enough money in your account to cover the amount of the payment when it’s due.
In addition, you should check your credit report to make sure you are not in default on any debts. In some cases, you can get a free credit report and score to find out where your financial health is.
Repayment term
When you borrow a loan, you expect your balance to go down over time as you make repayments. However, many borrowers find that their balances increase even as they pay down the debt.
Interest is one of the primary reasons that a loan balance rises. As a borrower, you want to pay as little interest as possible. This is because interest is the primary source of income for banks and lenders.
In addition, there are a number of other factors that can contribute to an increased loan balance. For example, if you miss payments or make late payments, the lender will charge you penalties that negatively affect your credit score.