Negative Amortization

Definition: Negative amortization occurs when a payment does not cover the interest due and unpaid interest is added to the loan balance.

Example

A loan accrues $900 in interest for a month, but the permitted payment is $700. If the unpaid $200 is added to principal, the balance grows by $200.

Keep the distinction clear

A payment that covers interest but no principal is interest-only; it does not, by itself, cause negative amortization. With negative amortization, the borrower owes more despite making the scheduled payment.

Related terms

Amortized Mortgage · Interest · Principal

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References: CFPB: Negative amortization

Pronunciation (US): NEG-uh-tiv am-er-tuh-ZAY-shun (capitals show stress)

Pronunciation reference: Merriam-Webster