Capitalized interest.
In plain English
Capitalized interest is interest that has built up but not been paid, and then gets added onto your principal (the original amount you borrowed). Once it is added, that interest becomes part of the balance the lender charges interest on going forward. So you end up paying interest on top of interest, which makes the loan grow faster. Capitalization usually happens at specific moments, such as when a deferment or forbearance ends, or when you leave a repayment plan.
01Why it matters
Capitalization quietly raises both your balance and every future interest charge, so a few hundred dollars of unpaid interest today can cost you noticeably more over the life of the loan.
02The math, step by step
You have a $20,000 loan and $2,400 of interest builds up while payments are paused. When that interest capitalizes, your balance becomes $22,400. At a 6% yearly interest rate, your yearly interest charge rises from $1,200 to $1,344. You are now being charged interest on interest, and that gap keeps compounding for as long as the loan is open.
03What this is NOT
Capitalized interest is not the same as interest simply adding up. Accrued interest sits separately until a triggering event folds it into your principal. Capitalization is that folding-in, and it is what makes future interest charges higher.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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