Negative amortization
Negative amortization occurs when your loan payment doesn’t cover the interest due. When this happens, the unpaid interest gets added to your principal balance, causing your total loan amount to grow rather than shrink. Your principal balance is the original amount you borrowed, not including interest or fees.
For example, let’s say you have a $20,000 loan with a variable interest rate. One month, the interest rate increases, and your required interest payment is $200. However, you only pay $150 that month. The remaining $50 in unpaid interest gets added to your principal balance, bringing it to $20,050. Over time, if this pattern continues, your loan balance will keep increasing. You can prevent negative amortization by covering at least the interest due on your loans each month.
Capitalized interest
Interest capitalization happens when unpaid interest and fees are added to your loan’s principal balance. This typically occurs after periods of forbearance, deferment or a grace period. For example, if you graduate from college with a certain type of student loan and enter a 6-month post-graduation grace period, your loan accrues unpaid interest during that time. If you don’t pay off this unpaid interest before the grace period ends, it’ll be added to your total loan balance.
Fees
When you apply for a loan, the lender may assess certain fees that could increase your loan balance. Here are a few common types:
- Origination fee: An origination fee is a 1-time upfront fee that may be charged for various loan types, including mortgages, car loans and student loans. The fee is generally a percentage of the total loan balance, like 0.5%, and it’s used to cover the costs of creating the loan, such as processing your application, underwriting and other costs. With some lenders, you may be able to pay for your origination fee separately up front. Otherwise, you can roll it into the loan, which can increase the total amount.
- Late fee: If you’re late with a loan payment, the lender may charge a flat fee or a percentage of the payment amount. This fee can increase your total loan balance.
- Missed payment fee: If your late payment becomes a missed payment, your lender may charge a flat fee or a percentage of the missed payment amount. The fees for missed payments can increase your loan balance.
- Closing fees: Some mortgage and home equity lenders let you roll closing costs — which can include things like appraisal and title search fees — into the loan, which can bring the balance up.
Taking out another loan
Certain types of loans, like a cash-out refinance, involve replacing your current loan with a new one. Sometimes, that process results in a higher total loan balance. For example, say you currently have $100,000 remaining on your mortgage and want to take out $25,000 to renovate your kitchen. With a cash-out refinance, your new total loan balance would be $125,000, plus any additional fees not paid at the time of the refinance.
How to keep your loan balance from increasing
In certain instances, like student loans that go into forbearance with capitalized interest, there isn’t much you can do to prevent your loan balance from going up. However, there are steps you can take to manage your loans and keep your balance heading in the right direction.
- Make timely payments: The best way to help keep your loan balance from increasing is to make timely payments. If you have an installment loan, such as a student or auto loan, you’ll know your payment schedule when you take out the loan. Sticking to the payment schedule can help ensure you pay off the loan as planned and avoid increasing the balance along the way.
- Understand your lender’s terms and fees: Read the fine print, especially regarding payment terms and fees. Understand the actions (or inactions) that could result in a fee, like late or missed payments.
- Look into paying extra: If you want to reduce your loan balance quickly, you might consider making additional payments on the principal or increasing your monthly payment. Before you do, make sure your lender doesn’t charge prepayment penalties.
- Set up automatic payments: If you’re worried about late or missed payment fees, setting up automated payments can help ensure loans are paid on time. Consider scheduling payments for strategic dates, like the day after you get paid, to ensure there’s enough money in your account.
Stay in control of your loan balance
Managing your loan balance doesn’t have to be complicated. By making timely payments, understanding your lender’s terms and considering strategies like automatic payments, you can help keep your balance on track and avoid unexpected increases.
If you’re looking for a personal loan with predictable terms, a Citi® Personal Loan offers fixed interest rates. With no origination fees and a discount for automatic payment enrollment, you’ll have clear, consistent monthly payments. Apply for a Citi® Personal Loan today to get started.
Frequently asked questions
What does outstanding principal balance mean?
Outstanding principal balance refers to the amount of money you still owe on your loan, not including interest or fees. It’s the portion of your original loan amount that you haven’t yet paid back. As you make payments, your outstanding principal balance decreases (unless unpaid interest or fees are added).
What is the difference between outstanding principal balance and payoff amount?
Your outstanding principal balance is the amount you still owe on the original loan, while your payoff amount is the total you’d need to pay to completely satisfy the loan at a given moment.
The payoff amount typically includes your outstanding principal balance, any accrued interest, and potentially other fees, such as a prepayment penalty. The payoff amount may be higher than your outstanding balance because it accounts for interest that has accumulated since your last payment.
What does a loan outstanding mean?
A loan outstanding means you have an active loan with a remaining balance that you haven’t fully repaid. The term “outstanding” refers to the amount still owed to the lender. This includes your principal balance and may also include any unpaid interest or fees that have accrued over time.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
