What is an Outstanding Balance?
An outstanding balance is the amount currently owed on a debt. It represents the remaining sum of money that the borrower needs to pay back to the lender, excluding any upcoming interest or fees.
Inspirational Example:
Imagine Sarah borrowed $10,000 to invest in her small business. She has successfully repaid $500 towards the principal and an additional $1,200 in interest costs. Currently, her outstanding balance stands at $9,500. This balance is pivotal in understanding how much more Sarah must repay to completely clear her debt.
How to Calculate Outstanding Balance
To calculate the outstanding balance on a loan or debt, follow these steps:
- Identify the original loan amount (principal).
- Determine the total amount paid towards the principal of the loan.
- Subtract the total principal paid from the original loan amount.
Formula:
Outstanding Balance = Original Loan Amount - Principal Paid
Example Calculation
Let’s use Sarah’s case again for better understanding:
- Original Loan Amount: $10,000
- Principal Paid: $500
- Outstanding Balance: $10,000 - $500 = $9,500
Frequently Asked Questions
Q: Does the outstanding balance include interest?
A: Typically, the outstanding balance does not include future interest or fees. It mainly refers to the remaining principal amount owed.
Q: How can I reduce my outstanding balance more quickly?
A: Regularly making additional payments towards your loan principal can significantly reduce your outstanding balance quicker. This strategy can also reduce the amount of interest you’ll have to pay over the life of the loan.
Q: Does a high outstanding balance affect my credit score?
A: Yes, a high outstanding balance can impact your credit score, as it represents how much of your available credit or loan balance you’ve used. Lower outstanding balances can positively affect your credit score.
Related Terms: Debt, Principal, Interest, Loan Balance, Credit.
