So you might have a loan ongoing currently, and you noticed that your loan balance keeps increasing! So you ask yourself, how, why and what increases total loan balance? Because your money absolutely does not grow on trees (that applies for everyone else too), so you absolutely deserve to know why the hell you are starting to owe more and more money to that loan you got!
Well, as always, I am here for you back with another finance article! Today, I will be talking about the things you might not necessarily know about loans, not for a lack of trying, but because they are not exactly in your face, or otherwise straight to the point.
Read also: “How hard is it to get a business loan?”
What Increases Total Loan Balance?
If you want to find out exactly how or what increases total loan balance, you have to be a little bit familiar with business terms! One of these terms that you have to be familiar with, especially within loans, is interest.
Usually, the word ‘interest’ is defined as the state of wanting to know more about something or someone. And, to be fair, it still is! But that would be the general meaning. In terms of business definitions, the word ‘interest’ is defined as money paid regularly at a particular rate.
In other words, interests can be a candidate for the question, what increases total loan balance. Though not only that, it is not really as simple as just having an interest on your loan that incrementally adds more and more debt to your outstanding balance.
What Is Interest In A Loan Setting?
Elaborating from my definition from earlier, in a loan setting, interests are simply the additional monetary charge that every borrower must pay as a sort of fee for being allowed to borrow money. There’s quite a bit of history involved in the concept of interests, like, renaissance era type history, but luckily for you, I will not be delving into that!
If I delved into that, I would literally just be regurgitating Wikipedia and other sources of information on the internet, in which case, why even go to this website right?
Anyway! To be more elaborate, there are actually two parts to interests. Both of which still answer what increases total loan balance; simple interest and compound interest.
Simple Interest
To know what increases total loan balance, you might want to get familiar with the term simple interest. It is a quick and convenient method of calculating the applied interest rates of any sort of loan you have. You just need to follow one simple formula, hence the name, in order to calculate the interest.
Formula: P x I x N, where P is Principal, I is Daily Interest Rate, and N is the number of days between payments.
Compound Interest
To figure out the other type of interest that answers what increases total loan balance, next is the term compound interest. From the name itself, it is not as simple as it seems. This is because the lender slaps interest on both the principal and the interest itself too.
As an example, let’s say you borrowed a thousand bucks with an Annual Percentage Rate (APR) of 10%. At the end of the year, you have to pay a thousand and a hundred bucks. The year after that, you have to pay a thousand and two hundred ten.
In other words, you might not want to get this loan if you do not want to think like me!
Read also: “5 Steps to Get A Loan From Cash App”
Honorable Mention
As an honorable mention for what increases total loan balance, we have just a few more to talk about. As respect for everyone’s time however, I will be simply firing away information quickly, not necessarily going in-depth.
Capitalization
It is simply the addition of unpaid interest to the overall total of the principal loan balance. So this is another factor that answers what increases total loan balance.
Delayed Repayments
While lenders often give you a stated amount of time to fully be able to repay fully or partially the borrowed money, you should not take this for granted. Because remember, there is the presence of interests as well as capitalization. Essentially, the longer you take in paying your loan, the bigger the price will be.
Conclusion
So, to be completely honest, there is not only a single factor on what increases total loan balance. It can be a multitude of factors building up a pile on your loan. To recap, they are interests, both simple and compound, capitalizations, and delayed payments. Though, keep in mind, these are only a few of the main contributing factors to what increases total loan balance! It totally depends on the contract and current stipulations.
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