finance
negative amortization
Negative amortization occurs when a loan's payments are less than the interest due, so the unpaid interest is added to the principal and the loan balance grows over time. It can happen with some adjustable-rate loans that have payment caps but no matching rate cap. Borrowers may end up owing more than they originally borrowed. Many consumer protections now restrict loans with this feature.
- Exam tip
- The trap: with negative amortization the balance goes up, not down. It is usually tied to payment caps on adjustable-rate mortgages.
- Example
- A borrower's monthly interest is $1,100, but a payment cap limits the payment to $1,000. The extra $100 is added to the loan balance each month.
Related terms & state variants
Sources
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Last verified: 2026-10-23