{"id":52517,"date":"2024-02-11T10:00:15","date_gmt":"2024-02-11T18:00:15","guid":{"rendered":"https:\/\/financer.com\/?post_type=wiki&#038;p=52517"},"modified":"2024-04-01T13:31:26","modified_gmt":"2024-04-01T20:31:26","slug":"capitalization","status":"publish","type":"wiki","link":"https:\/\/financer.com\/loans\/articles\/capitalization\/","title":{"rendered":"Loan Capitalization"},"content":{"rendered":"\n<p>The term &#8220;capitalization&#8221;, when applied to loans, might sound a bit intimidating. But it&#8217;s a straightforward concept that has a real impact on the total cost of your borrowing. This article breaks down capitalization and how it relates to your financial responsibilities.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"What_is_Capitalization\"><strong>What is Capitalization?<\/strong><\/h2>\n\n\n\n<p>Capitalization is the process of adding unpaid <a href=\"https:\/\/financer.com\/loans\/glossary\/interest\/\">interest<\/a> to the principal balance of your loan. The principal is the original sum you borrowed. When interest isn&#8217;t paid on time, it may be capitalized, meaning it becomes part of that principal balance.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Why Does This Matter?<\/strong><\/h4>\n\n\n\n<p>Capitalization is important because once your unpaid interest is added to the principal, you start paying interest on that interest, increasing the overall cost of your loan. Essentially, you&#8217;re paying interest on a larger amount.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"When_Does_Capitalization_Occur\"><strong>When Does Capitalization Occur?<\/strong><\/h2>\n\n\n\n<p>Capitalization of interest on loans generally happens in a few key situations:<\/p>\n\n\n\n<ul>\n<li><strong>Unsubsidized Student Loans:<\/strong>\u00a0Interest continues to accrue during deferment or forbearance,\u00a0regardless of whether you&#8217;re making payments.\u00a0At the end of those periods,\u00a0any unpaid interest can capitalize.\u00a0Subsidized loans,\u00a0on the other hand,\u00a0receive interest subsidies (paid by the government) during certain qualifying periods,\u00a0which lowers the likelihood of capitalization.<\/li>\n\n\n\n<li><strong>Income-Driven Repayment (IDR) Plans:<\/strong>\u00a0Some <a href=\"https:\/\/studentaid.gov\/manage-loans\/repayment\/plans\/income-driven\">IDR plans for federal student loans<\/a> subsidize unpaid interest if your income is eligible.\u00a0If you change out of these plans or no longer qualify,\u00a0unpaid accrued interest could be capitalized.<\/li>\n\n\n\n<li><strong>Missed or Late Payments:<\/strong>\u00a0This varies depending on the type of loan.\u00a0With some mortgages or personal loans,\u00a0lenders may capitalize unpaid interest from late or missed payments,\u00a0increasing your balance.<\/li>\n\n\n\n<li><strong>Loan Modification:<\/strong>\u00a0If you undergo a <a href=\"https:\/\/financer.com\/loans\/glossary\/what-is-a-mortgage\/\">mortgage<\/a> loan modification,\u00a0unpaid interest might be capitalized into a new principal balance.<\/li>\n<\/ul>\n\n\n\n\t\t<div id=\"genericloan_0_form\" class=\"fs-slider fs-slider--tooltip search-hero--bg1\"><h3>Compare loans from 79 lenders<\/h3><p>Find the cheapest rate with one click<\/p><div class=\"step amount\">    <div class=\"slider_cont step__value\">\n        <span class=\"fl_l_m_15 amount_display\"><\/span>\n    <\/div>\n    <div class=\"step__slider\">\n        <input type=\"range\" data-default-value=\"500\" data-name=\"param_amount\" \/>\n    <\/div>\n<\/div><div class=\"step stepSubmit\"><a id=\"submitSliders\" href=\"https:\/\/financer.com\/results?query=1&non_affiliate=true&param_amount=500&loan_broker_filter_active=true&param_period=360&\" data-slider-url=\"https:\/\/financer.com\/results?query=1&non_affiliate=true&param_amount=500&loan_broker_filter_active=true&param_period=360&\" data-required=\"results?query=1non_affiliate=true&param_amount=500&loan_broker_filter_active=true&param_period=360&\" class=\"get_results compare button is-primary is-medium is-rounded\">Compare Offers<\/a><\/div>\t\t<\/div><h2 class=\"wp-block-heading\" id=\"How_Does_Capitalization_Influence_Repayment\"><strong>How Does Capitalization Influence Repayment?<\/strong><\/h2>\n\n\n\n<p>Here&#8217;s how capitalization can affect your loan:<\/p>\n\n\n\n<ul>\n<li><strong>Increased Principal Balance:<\/strong>\u00a0Your loan balance grows, leading to a longer overall repayment term.<\/li>\n\n\n\n<li><strong>Higher Monthly Payments:<\/strong>\u00a0In many cases, increased principal leads to higher monthly payments.<\/li>\n\n\n\n<li><strong>Greater Total Loan Cost:<\/strong>\u00a0You&#8217;ll end up paying more overall in interest for the loan&#8217;s lifetime.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Examples_of_Capitalization\"><strong>Examples of Capitalization<\/strong><\/h2>\n\n\n\n<p>To make the concept of capitalization crystal clear, here are some practical examples:<\/p>\n\n\n\n<ul>\n<li><strong>Student Loan Scenario:<\/strong> You graduate with $20,000 in unsubsidized student loans at a 6% interest rate. During graduate school, you place those loans into deferment for two years. During those two years, approximately $2,400 in interest accrues. Upon exiting deferment, that $2,400 is capitalized, making your new principal balance $22,400. You now owe interest on a larger amount.<\/li>\n\n\n\n<li><strong>Mortgage Scenario:<\/strong> Let&#8217;s say you miss a mortgage payment, and your lender charges you $300 in late fees and unpaid interest. This $300 is capitalized, meaning it&#8217;s added to your mortgage balance. Going forward, you&#8217;ll be charged interest on that added late fee\/interest amount.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Capitalization_vs_Accrual\"><strong>Capitalization vs. Accrual<\/strong><\/h2>\n\n\n\n<p>Understanding the difference between interest capitalization and interest accrual is important:<\/p>\n\n\n\n<ul>\n<li><strong>Accrual:<\/strong>\u00a0Accrual is the regular accumulation of interest that occurs on your loan.\u00a0Think of it as a meter constantly running,\u00a0adding interest charges over time.<\/li>\n\n\n\n<li><strong>Capitalization:<\/strong>\u00a0Capitalization is the specific event where unpaid,\u00a0accrued interest gets added to your loan&#8217;s principal.\u00a0It&#8217;s like hitting a &#8220;reset&#8221; button on the accrual meter,\u00a0but this reset makes your overall loan more expensive.<\/li>\n<\/ul>\n\n\n\n                <div class=\"fn_block block_fn_msg_box cost search-hero--bg1\">\n\t\t\t\t<h3>How to save <span class=\"compare-amount\">$619.00 <\/span> on your loan<\/h3>\n\t\t\t\t<p>The price difference for a $500.00 loan in 90 days is $619.00.<\/p>\n\t\t\t\t<p class=\"has-text-left\"><a href=\"https:\/\/financer.com\/results\/?query=1&filter_non_affiliate=1&param_amount=500&param_period=90\" class=\"button is-normal is-primary is-rounded\">Find out how<\/a><\/p>\n                <\/div><h2 class=\"wp-block-heading\" id=\"Minimizing_the_Effects_of_Capitalization\"><strong>Minimizing the Effects of Capitalization<\/strong><\/h2>\n\n\n\n<p>While capitalization can increase your loan cost, there are proactive steps you can take to lessen its impact:<\/p>\n\n\n\n<ul>\n<li><strong>Make Interest-Only Payments (If Possible):<\/strong> During periods of deferment, <a href=\"https:\/\/financer.com\/loans\/glossary\/forbearance\/\">forbearance<\/a>, or when struggling financially, try making payments that cover at least the accrued interest each month. This prevents significant growth in your principal balance due to capitalization.<\/li>\n\n\n\n<li><strong>Explore Income-Driven Repayment (IDR) Plans:<\/strong> If you have federal student loans, specific IDR plans subsidize a portion of any unpaid interest. This means the unpaid interest is less likely to capitalize, even when payment pauses occur.<\/li>\n\n\n\n<li><strong>Consider Loan Consolidation:<\/strong> Consolidating federal student loans before unpaid interest capitalizes can essentially reset your loan to the original principal balance. However, carefully research whether direct consolidation is right for you, as weighted-average interest rates might apply.<\/li>\n\n\n\n<li><strong>Contact Your Lender Proactively:<\/strong> If you know you will have trouble making upcoming payments, reach out to your lender <em class=\"\">before<\/em> payments are missed. Many lenders have options or hardship programs to help navigate challenging situations that could potentially prevent capitalization.<\/li>\n<\/ul>\n\n\n\n<p><strong>Important: Not all of these strategies will apply to every loan type. Carefully review your specific loan terms and contact your loan servicer or lender for the most accurate advice.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Frequently_Asked_Questions\">Frequently Asked Questions<\/h2>\n\n\n<div class=\"fn_block block_fn_faq_list\"><h4>Can I avoid capitalization on my loans?<\/h4><div class=\"faq_inner\"><p>In many cases, yes! The best way is to always pay at least the accrued interest each month, even if you&#8217;re in a deferment or forbearance period. If that&#8217;s not possible, talk to your lender about potential options to minimize capitalization impacts.<\/p><\/div><h4>Does capitalization happen on all types of loans?<\/h4><div class=\"faq_inner\"><p>No. While many types of loans can have capitalization clauses, it&#8217;s not universal. Always carefully review your loan terms and check with your lender to understand their specific policies regarding capitalization.<\/p><\/div><h4>If my interest capitalizes, will my monthly payment increase?<\/h4><div class=\"faq_inner\"><p>It depends. Capitalization increases your principal balance. Some repayment plans have fixed monthly payments so capitalization wouldn&#8217;t immediately raise your monthly bill. However, you&#8217;d accrue more interest over time leading to a higher total repayment cost. Ultimately, contact your lender if concerned.<\/p><\/div><h4>Is there a difference between capitalized interest and compound interest?<\/h4><div class=\"faq_inner\"><p>Yes. Compound interest refers to when interest accrues on the principal and on past accrued interest. This regular cycle happens with most loans. Capitalization is a specific event when unpaid interest becomes part of your principal.<\/p><\/div><h4><\/h4><div class=\"faq_inner\"><\/div><\/div>","protected":false},"author":37432,"featured_media":52526,"comment_status":"open","ping_status":"closed","template":"","meta":{"disable_branded_featured_image":false,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","ep_exclude_from_search":false,"footnotes":""},"categories":[1076],"_links":{"self":[{"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/wiki\/52517"}],"collection":[{"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/wiki"}],"about":[{"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/types\/wiki"}],"author":[{"embeddable":true,"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/users\/37432"}],"replies":[{"embeddable":true,"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/comments?post=52517"}],"version-history":[{"count":10,"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/wiki\/52517\/revisions"}],"predecessor-version":[{"id":53545,"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/wiki\/52517\/revisions\/53545"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/media\/52526"}],"wp:attachment":[{"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/media?parent=52517"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financer.com\/wp-json\/wp\/v2\/categories?post=52517"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}