Loan mechanics

Negative amortization

A loan balance that grows because payments do not cover the interest due

When the scheduled payment is less than the interest accruing, the shortfall is added to the principal and the debt increases while the borrower is paying. It is the mechanism behind several loan products that drew regulatory attention.

The features described here are examinable loan mechanics, not a recommendation. Whether any particular loan product is suitable for a borrower is a question for a licensed mortgage professional.

How the exam asks about it

Its presence is a red flag in predatory lending items, and disclosure of it is a Truth in Lending concern.

Related terms

AmortizationPredatory lendingTruth in Lending Act (Regulation Z)

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