What is one consequence of negative amortization?

What is one consequence of negative amortization?

• A. Reduction in the loan balance
• B. Increase in the loan balance due to unpaid interest
• C. Quick repayment of the mortgage
• D. Lower monthly payments compared to traditional loans

Answer: (B)

Negative amortization occurs when the payments made on a loan are not sufficient to cover the interest due, resulting in the unpaid interest being added to the principal balance. This means that instead of reducing the amount owed, the overall balance of the loan actually increases. This can create significant financial challenges for borrowers, as they may end up owing more than they initially borrowed, even after making regular payments. In contrast, the other options do not reflect the realities of negative amortization. The loan balance is not reduced; in fact, it grows. There is also no "quick repayment" of the mortgage since negative amortization typically leads to larger amounts owed over time, often extending the repayment period. While lower monthly payments may be associated with some types of loans, the critical point with negative amortization is that payments do not cover the accrued interest, leading to an increase in the loan balance rather than a decrease.

Negative amortization occurs when the payments made on a loan are not sufficient to cover the interest due, resulting in the unpaid interest being added to the principal balance. This means that instead of reducing the amount owed, the overall balance of the loan actually increases. This can create significant financial challenges for borrowers, as they may end up owing more than they initially borrowed, even after making regular payments.

In contrast, the other options do not reflect the realities of negative amortization. The loan balance is not reduced; in fact, it grows. There is also no "quick repayment" of the mortgage since negative amortization typically leads to larger amounts owed over time, often extending the repayment period. While lower monthly payments may be associated with some types of loans, the critical point with negative amortization is that payments do not cover the accrued interest, leading to an increase in the loan balance rather than a decrease.