If you've ever taken out a student loan or opened a credit card, you've probably gotten a phone call, letter or email about the outstanding balance on your account. That can be an intimidating term, but understanding what an outstanding balance is and what you actually have to pay upfront can be fairly straightforward.
What Is an Outstanding Loan Balance?
The Ascent's definition for an outstanding balance is the amount you owe on any debt that charges interest. Another term for an outstanding balance is your current balance. Depending on your account's arrangements and particulars, an outstanding balance can include unpaid interest that has been added to the principal, or the original amount borrowed. This kind of account is usually referred to as a compound interest account.
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Another way of thinking about your outstanding balance is understanding the amount of debt that you have not yet repaid. For example, if you borrowed $4,000 and paid back $500, the outstanding balance would be $3,500.
Interest on debt is usually calculated based on the outstanding balance rather than the original amount borrowed. This means that as you pay down the principal amount borrowed, the interest payment will also be reduced.
Calculating Outstanding Balance
While the above outstanding balance example is a simple and straightforward representation to help understand the concept, it doesn't properly account for interest. Interest is a percentage of the original or outstanding balance owed to the lending establishment as security against the amount you've borrowed. Think of it as a little extra each payment period to show that you intend to pay back the original amount and as thanks for the loan (it's also how lenders make money). If you would like to calculate your interest and payments, according to the Corporate Finance Institute, you may do so by hand. However, it's much simpler to use an online outstanding balance calculator.
Sites like The Money Calculator and the Mortgage Calculator are helpful options. The Money Calculator is a good option for evaluating credit card or personal loan outstanding balances, while the Mortgage Calculator is better for larger loans, such as home loans that have lower interest rates and longer terms.
Paying Down the Minimum Required Amount
Ultimately, as you try changing the information in these calculators, you'll see that one of the best ways to reduce your debt is to make a high monthly payment. If you pay only the minimum required each month, the total amount you will pay to the lending institution over the course of the loan will be significantly higher than the principal amount because of interest. With that said, however, finance is very personal and not everyone can afford to invest that much of their monthly budget to pay down debts. These tools will hopefully allow you to understand what you can invest and where.
One of the more common debt-management techniques is to pay the minimum amount on all but one of your debts and focus on paying down the highest-interest debt account first with as much as possible each month.
As you cycle through the highest-interest accounts, you'll have lower and lower monthly expenses, which will allow you to put that extra money toward paying down the rest of your debts. In the end, you'll find yourself in a manageable situation where you actually have disposable income and can be out of debt completely.