Why Your Balance Goes UP After Making a Payment
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- Опубліковано 7 чер 2024
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Have you noticed that your loan amount keeps going up, even though you're making your monthly payments?
The first thing to understand is the concept of CAPITALIZED INTEREST.
Imagine this is your loan amount. It doesn't matter what the number is, but imagine that's how much you owe on your statement that says what your loan balance is.
If you paid just the interest that was due every month, that would be considered interest only, and your loan amount would never change. It would stay the same.
If you pay the interest that you owe, plus some of the principal, then your loan amount over time would go down. But in a lot of cases, we are given a minimum payment amount that is actually not even enough to cover the interest that's due each month on the loan.
In that case, the lender takes whatever interest was not paid and they add it to the loan amount. Each month, if you are not paying the interest portion of your payment, your loan balance will start to go up
Although it seems like the bank might be being nice by giving you an income driven payment arrangement where you just pay what you can afford, you're just not paying enough to cover your interest every month.
The second reason that sometimes your loan amounts going up is because if you have a VARIABLE INTEREST RATE on your loan, when that changes periodically, as opposed to a FIXED RATE in which the rate stays the same throughout the life of the loan, sometimes the amount of interest that you owe each month can go up. And if your payment doesn't change to adjust with that increased interest rate, then suddenly you're into, back into a situation where some of your interest is getting capitalized and put back onto your loan.
We see this happen with student loans, credit cards, all kinds of different loans, especially those that have variable interest interest rates.
Now let's talk about what you can do to stop this from happening and to start actually paying your loan down. The first thing you want to do is understand your interest rate. Sometimes it's not easy to even tell what your interest rate is on your loan just by looking at the statement. You might have to dig down, or you may have to contact your lender to find out what your current interest rate is.
Once you understand your interest rate, then you can Determine how much interest is accruing on your loan each month and regardless of what the lender says, your minimum amount should be, you want to at least be covering the interest that's accruing.
You want to find your interest rate, multiply that times your loan amount. That will give you your annual interest that's due. Then, divide that by 12 to get your monthly interest.
Once you understand what your monthly interest accrual is, then you know what that interest only payment would be. If you paid just that amount, your loan balance would never change, because it doesn't include any principal.
So then you determine if you're able to pay any amount above and beyond that monthly interest amount. If you can, you should, and then you'll start paying your loan down.
If you're not able to afford even the monthly interest, then you should definitely contact your lender and see what your options are for refinancing.
It's entirely possible that the lender will be able to either modify your existing loan and lower your rate, or another lender will refinance your loan, pay off your existing loan, and give you a new loan with better terms.
I created a real simple spreadsheet for you. You can find the link down in the description, and it will help you determine what your monthly interest is and how fast you'll pay off your loan using various payment amounts.
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I appreciate how clearly you explain things! Thanks!
You're very welcome! - Trevor
Super Helpful. You explained it so well and the spread sheet helped very much. Thank You
Hi Adrian. Thanks for the comment. I'm happy to hear it was helpful! - Trevor
Thank you for this very helpful video and spreadsheet. As a first home buyer it is invaluable.
You’re very welcome. Glad you liked it! - Trevor
Thank you sir! I think at first when I was watching this video for the first moment... I just assumed that you were going to just tell people to make larger payments to build into the loan ultimately... which is what is happening, but thank you for opening my eyes to the idea that they are actually setting the mortgage lower and are you are not even making the satisfying the minimum of the payments... (I was looking at my house payment this morning... ) Screw Christmas, I'm tired of being owned by the bank lol.
Thank you for the comment! - Trevor
man your amazing
Thank you, Miguel!
Thank you for explaining this kinda seems like the bank is stealing it’s kind of scam me that doesn’t seem legal
This man is a God
Possibly an overstatement, but hey, I’ll take it. 🤣 Thank you! - Trevor
Soo basically, pay more than the minimum amount each month?
Yes! Especially if you have a high interest rate, like a credit card. The “minimum” payment is designed to keep you paying forever because it doesn’t even cover the amount of interest that accrues each month. Grab my free loan payment calculator for help! - Trevor
according to what I've read in b.o.e. the banks suppose to pay the interest
Not so. The bank collects interest. They don’t pay it. The borrower owes all of the interest that accrues, even if the payment is not sufficient to cover the interest. The unpaid portion is just capitalized onto the balance.
One of the tactics lenders use to keep people indebted is requiring minimum payments that are less than the amount of interest owed. So it’s best to pay at least the amount of the interest that accrues.
Does making two payments in a month have the same effect?
Thanks for this awesome information!
Yes, but you should read the terms of your note and speak with your loan servicer to determine the best way to do that. Usually, you have to provide specific instructions with each payment when you are making more than one payment per month. Hope that helps. - Trevor