Question

If a payment cap is applied and the required payment does not cover the interest expense, the unpaid interest is added to the loan thereby increasing the loan balance even though the required payment is being made. This is known as ___________.

Answer 1

The condition when a payment cap is applied and the required payment does not cover the interest expense, the unpaid interest is added to the loan thereby increasing the loan balance even though the required payment is being made, is known as a negative amortization.

What is negative amortization?

A condition where the amount owed by an individual keeps adding even after the repayments are done is known as negative amortization.

Such condition of a negative amortization arises as the amount being repaid does not fully or partly cover the interest amount.

Hence, the significance of negative amortization is aforementioned.

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