💣 What Is Negative Amortization?
Negative amortization happens when your loan payments are too small to cover the interest that’s building up. Instead of your balance going down, it actually goes up over time.
So even though you’re making payments, you owe more than you did before.
🔍 Real-World Example:
Let’s say you have a student loan or a mortgage with a payment of $100 per month, but the interest charged that month is $120.
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You pay $100
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The remaining $20 gets added to your loan balance
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Now you owe more than before the payment!
That’s negative amortization in action.
🚩 Why It’s a Problem:
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Your debt grows instead of shrinks
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It can lead to longer repayment and higher total costs
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You might owe more than your house or asset is worth
✅ How to Avoid It:
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Make fully amortizing payments
– Always pay enough to cover interest and reduce the principal. -
Avoid minimum payments on adjustable-rate or interest-only loans
– They often don’t cover the full interest. -
Understand your loan terms
– Some loans are structured to allow negative amortization. Ask your lender:“Will my balance ever increase if I only make the minimum payment?”
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Pay extra when possible
– Even small extra payments toward principal help avoid this trap. -
Refinance if needed
– If your current loan is risky, refinancing to a more stable fixed-rate loan can help.
🔑 Bottom Line:
If your loan balance is growing despite your payments, that’s a red flag. Keep an eye on your statements and make sure you’re making progress — not falling behind.