Capitalized interest refers to the process of adding unpaid interest charges to the balance of a loan or asset. This can happen when loan payments are paused for a period of time, such as during deferment or forbearance, or when the borrower is not making payments on the loan. Capitalized interest is the cost of borrowing to acquire or construct a long-term asset. It is added to the principal balance of the loan, which increases the total amount that the borrower has to pay back. Capitalized interest can only be used for long-term assets, usually in the form of constructing real estate such as a headquarters.
For example, capitalized interest on student loans is the interest that accrues on a loan and is added to the principal balance of the loan. This can happen when the borrower is not making payments on the loan, and interest continues to accrue as is the case most often while the student is attending school. Capitalized interest is something to avoid, otherwise, the borrower will repay much more than they originally borrowed. However, borrowers can avoid capitalized interest by paying off the interest before it capitalizes.
