Capitalising Interest
Capitalising interest occurs when accrued or accumulated interest is added to your loan principal instead of being paid out month to month. In capitalising interest, the loan amount continuously increases, and so does the total cost of the loan (including interest and ongoing fees). Basically, you are using borrowed money to pay out your loan and are essentially paying interest on your interest. As a result, you pay more and more interest over time. Capitalising interest is usually observed in deferred or insufficient payments, where the interest is carried over to succeeding payment periods.