negative amortization
A loan condition where minimum payments are insufficient to cover interest — causing the balance to grow despite making payments.
Example
“Negative amortization on the adjustable mortgage caused the balance to increase $200 a month despite regular payments.”
Memory Tip
GROWING BALANCE — you are paying but owing more. Never accept this in a loan.
Why It Matters
Understanding negative amortization is critical because it means your debt actually grows larger over time even though you are making regular payments. This can trap borrowers in a cycle where they owe more money than they originally borrowed, making it harder to ever pay off the loan completely.
Common Misconception
Many people assume that making the minimum payment on any loan will always reduce what they owe. In reality, with negative amortization loans, minimum payments can be so low that they do not even cover the monthly interest, causing the unpaid interest to be added back to the principal balance.
In Practice
Imagine you take out a loan for 300,000 dollars with a 6 percent annual interest rate and make minimum payments of only 1,000 dollars per month. If the monthly interest charges are 1,500 dollars but you only pay 1,000 dollars, the unpaid 500 dollars gets added to your loan balance each month, so after one year you would owe roughly 306,000 dollars instead of less.
Etymology
From Latin 'amortire' meaning to kill — but here the debt grows instead of dying.
Common Misspellings
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Related Terms
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See Also
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