Capitalized InterestCredit Repair Definition
Unpaid interest that is added to the principal balance of a loan, increasing the total amount owed.
Definition
Capitalized interest is unpaid accrued interest that is added to the principal balance of a loan. When interest capitalizes, the outstanding loan balance increases, and future interest charges are calculated based on this new, higher principal amount. This essentially means you start paying interest on the previously unpaid interest. Interest capitalization commonly occurs with certain types of loans during periods when payments are deferred or postponed, such as student loans during grace periods or forbearance, or some construction loans. While capitalization can provide temporary payment relief, it ultimately increases the total cost of the loan over its lifetime.
Frequently Asked Questions
When does interest typically capitalize on student loans?
For federal student loans, unpaid interest typically capitalizes at the end of the grace period (after leaving school), after periods of deferment or forbearance (for unsubsidized loans), and sometimes upon entering or leaving certain repayment plans like Income-Based Repayment (IBR).
How can I avoid interest capitalization?
The primary way to avoid interest capitalization is to pay the accrued interest before it's added to your principal balance. For example, making interest-only payments during deferment or forbearance periods on unsubsidized loans can prevent the principal from growing.
Does capitalized interest increase my monthly payments?
Yes, capitalized interest increases your principal balance, which typically leads to higher monthly payments once you enter repayment, or it extends the repayment period if payments remain the same. It also increases the total amount of interest you'll pay over the life of the loan.
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