What is negative amortization?

Negative amortization describes the process that causes a loan balance to increase over time, despite regular payments being made. This occurs when your monthly payments do not cover all the interest you’ve been charged that month. The unpaid interest is added to the principal, and the following month you’ll be charged interest on the new, higher balance (the principal plus the previous month's unpaid interest). Negative amortization may also be referred to as “NegAm” or “deferred interest” or “compound interest.”

Related term: Amortization