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Why Your Loan Balance Goes UP After Making a Payment - Capitalization & Negative Amortization - YouTube
Channel: Trevor Calton
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have you noticed that your loan amount
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keeps going up
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even though you're making your monthly
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payments hi this is trevor
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and in this video i'm going to show you
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why your loan amount keeps going up even
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though you're making your payments every
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month
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and what you can do about it to lower
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your interest rate
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lower your payment and pay your loan off
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faster i'm also going to include
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a handy spreadsheet so that you can plug
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in your real numbers
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and see what sort of payments you need
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to make to get out of debt faster
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the first thing to understand is the
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concept of capitalized
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interest imagine this is your loan
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amount
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it doesn't matter what the number is but
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imagine that's how much you owe
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on your statement this is what your loan
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balance is
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if you paid just the interest that was
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due
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every month that would be considered
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interest only and your loan amount would
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never change it would stay the same
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if you pay the interest that you owe
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plus
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some of the principal then your loan
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amount over time
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would go down but in a lot of cases
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we are given a minimum payment amount
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that is actually not even enough
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to cover the interest that's due each
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month on the loan
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in that case the lender takes whatever
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interest was not paid
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and they add it to the loan amount so
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each month if you are not paying the
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interest portion
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of your payment your loan balance will
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start to go
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up although it seems like the bank might
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be being nice
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by giving you an income driven payment
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arrangement
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where you just pay what you can afford
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you're just not paying enough
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to cover your interest every month the
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second reason that
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sometimes your loan amounts going up is
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because if you have a variable interest
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rate on your loan
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one that changes periodically as opposed
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to a fixed rate
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in which the rate stays the same
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throughout the life of the loan
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sometimes the amount of interest that
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you owe each month can go
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up and if your payment doesn't change to
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adjust
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with that increased interest rate then
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suddenly you're into back into a
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situation where some of your interest is
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getting capitalized and put back onto
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your loan
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we see this happen with student loans
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credit cards
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all kinds of different loans especially
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those that have variable interest rates
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so now let's talk about what you can do
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to stop this from happening
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and to start actually paying your loan
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down
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the first thing you want to do is
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understand your interest rate
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sometimes it's not easy to even tell
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what your interest rate is
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on your loan just by looking at the
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statement you might have to dig
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down or you may have to contact your
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lender to find out what your current
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interest rate is
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once you understand your interest rate
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then you can determine how much
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interest is accruing on your loan each
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month
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and regardless of what the lender says
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your minimum amount should be
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you want to at least be covering the
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interest that's accruing
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so let's look at that again you want to
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find
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your interest rate multiply that
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times your loan amount and that will
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give you your annual interest
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that's due then divide that by 12
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to get your monthly interest once you
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understand what your
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monthly interest accrual is then you
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know what that
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interest only payment would be if you
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paid just that amount
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your loan balance would never change
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because it doesn't include any principal
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so then you determine if you're able to
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pay
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any amount above and beyond that monthly
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interest amount
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if you can you should and then you'll
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start paying your loan down
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if you're not able to afford even the
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monthly interest
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then you should definitely contact your
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lender and see
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what your options are for refinancing
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it's entirely possible that the lender
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will
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be able to either modify your existing
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loan and lower your rate
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or another lender will refinance your
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loan
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pay off your existing loan and give you
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a new loan
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with better terms sometimes it's easier
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to look at the numbers
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so i created a real simple spreadsheet
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for you you can find the link down in
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the description
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and it will help you determine what your
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monthly interest is
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and how fast you'll pay off your loan
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using
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various payment amounts so let's go take
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a look at it
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this should be pretty easy for just
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about anybody to use you can use it in
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google sheets or there's an excel
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version
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and here you can put in whatever your
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current loan balance is or your loan
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amount
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make sure you get your interest rate
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find out what that is put that in there
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your lender's minimum payment
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and also your next payment date and this
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will
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then allow you to see when if ever your
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loan is going to get paid off
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at whatever payment you're making so
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in this column here this tells you based
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on the information that you put in the
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yellow boxes
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what your interest only payment is and
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if you make that payment every month
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that means your balance will never
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change it'll just stay the same so that
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would be the minimum
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in any point that you want to pay so
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that your loan amount doesn't go
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up here in this column i show
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what your loan balance will do if you're
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paying whatever the lender says your
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minimum payment should be
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and in this case as you see the lender's
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minimum isn't even enough to cover the
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interest
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so that means that the loan amount over
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time is going to go
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up and it will just keep going up at a
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faster and faster rate
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forever so you obviously don't want to
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make
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that payment and then i put in all these
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sections here so you can compare side by
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side
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whatever your monthly payment amount
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that you can afford or
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what you think you might be able to do
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and you can see
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how long it will take to pay off the
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loan in this example
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it will take us about 12 years to pay
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off this loan
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at 600 a month whereas if we could go up
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to
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double that it would only take us about
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four years to pay off the loan
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and if we could go even further we could
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pay off the loan here
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in just over two years at two thousand
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dollars a month
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there's a link in the description to
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this spreadsheet so feel free to
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download it it's yours to use
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i hope you find this helpful if you like
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this video i've got a whole library
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of finance real estate and investing
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lessons
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so be sure to hit that subscribe button
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and we'll see you next time
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this is trevor thanks for watching
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