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I made my first payment $105 toward a small business loan. why did my balance go up?

lindsay - 2007-01-13 01:50:52 - Small Business

My home was damaged during hurricane rita and I just started the payback process. Supposedly it was something like 2% interest on a 24,500 loan. I made my first installment payment of $105 which is what they said I would pay for the next 25 years. My balance went up to 24,700 after I made the first payment. How does this ever get paid off. I thought it would go down every month. Any advice or answers.I am a single mom with five children and am feeling very discouraged. this was a loan from the small business association that were helping repair homes from hurricane rita. All I know is it was a small interest loan at 2% interest and I thought I paid $105 and the balance would go down

Best Answer:

I would say to first look at your bill or your statement and see what the finance charge or interest is on the loan. With a balance that large, over a period that long, you will spend probably a couple of years paying interest and finance charges alone. If you continue to make minimum payments, it will take quite some time for your balance to go down. On many loans, the first statement of the year will include all finance charges for the previous year. If this is the case with your bill, you will see your balance slowly decrease until next January, when they slam you with more fees. Unfortunately, banks are not friendly to single mothers, or to any one else who isn't a millionaire. Some banks will penalize you if you pay more than your minimum payment (as they make less interest off of you) or if you pay your loan off early. This is relatively uncommon, but it happens. If this is not the case with your loan, I would strongly reccomend paying more than your minimum payment whenever you can. Even if that means your minimum is $105 and you pay $110. Those $5 per month can add up, especially over 25 years.

Answers:

I would say to first look at your bill or your statement and see what the finance charge or interest is on the loan. With a balance that large, over a period that long, you will spend probably a couple of years paying interest and finance charges alone. If you continue to make minimum payments, it will take quite some time for your balance to go down. On many loans, the first statement of the year will include all finance charges for the previous year. If this is the case with your bill, you will see your balance slowly decrease until next January, when they slam you with more fees. Unfortunately, banks are not friendly to single mothers, or to any one else who isn't a millionaire. Some banks will penalize you if you pay more than your minimum payment (as they make less interest off of you) or if you pay your loan off early. This is relatively uncommon, but it happens. If this is not the case with your loan, I would strongly reccomend paying more than your minimum payment whenever you can. Even if that means your minimum is $105 and you pay $110. Those $5 per month can add up, especially over 25 years.

The thing with loans is that banks make you pay the interest first. After the interest(their profits) are paid off, then you begin to pay the principal to them. The reason why the balance went up is because even though you paid some money to the bank, the interest on the loan was being compounded and therefore the amount you have to pay back increased because of the compounded interest. If you want to beat the hikes in the balance, you must pay back a little more than the minimum to the bank, otherwise you might end up paying for this loan for the rest of your working life. Why did you request for a business loan to rebuild your house? It's a really bad idea; it's not the best loan to use for rebuilding your home....Try and find a better loan.