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Negative Amortization

Negative amortization occurs when a loan payment is not sufficient to cover the interest due, resulting in the unpaid interest being added to the loan balance.

It happens when a loan’s payment for principal and interest results in an increase in the loan balance.

The principal of the loan increases over time as a result of the additional interest being applied to it.

Example of Negative Amortization

Let’s say you have a loan with a monthly payment of N50,000, but the interest due that month is N60,000. The remaining N10,000 in interest gets added to the principal balance, increasing the total amount owed. This can lead to a situation where the loan balance grows instead of shrinking over time, which is negative amortization.

Is Negative Amortization good or bad?

Negative amortization is typically regarded as unfavourable since it may result in a bigger loan balance and a longer payback term, both of which may eventually cost more in interest.

Negative amortization might lower monthly payments initially, but it can also lead to long-term financial strain.

Is Negative Amortization the same as Reverse Mortgage? 

No, Negative Amortization occurs when payments don’t cover the interest, causing the balance to increase, while a Reverse Mortgage is a loan for homeowners 62 and older that uses the home’s equity as collateral and pays out a tax-free income stream.

Negative amortization can occur with certain types of loans, while reverse mortgages are a specific type of loan designed for seniors to access their home equity without making monthly payments.

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Related Terms:

Impaired Loan

Annual Percentage Rate (APR)

Accrued Interest


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