DEFINITION of 'Negatively Amortizing Loan'
A loan with a payment structure that allows for a scheduled payment to be made where it is less than the interest charge on the loan at the time the scheduled payment is made. When a payment is made which is less than the interest charge at the time, deferred interest is created. The amount of deferred interest created is added to the principal balance of the loan, leading to a situation where the principal owed increases over time instead of decreases.
BREAKING DOWN 'Negatively Amortizing Loan'
For example, consider a loan with an 8% annual interest rate, a remaining principal balance of $100,000, and a provision that allows the borrower to make $500 payments at a certain number of scheduled payment dates. The interest due on the loan at the next scheduled payment would be: 0.08 / 12 x 100,000 = $666.67. If the borrower makes a $500 payment, $166.67 in deferred interest ($666.67  $500) will be added to the principal balance of the loan for a total remaining principal balance of $100,166.67. The next month's interest charge would be based on this new principal balance amount, and the calculation would continue each month leading to increases in the loan's principal balance, or negative amortization.
Negative amortization cannot continue indefinitely. At some point, the loan must start to amortize over its remaining term. Typically, negatively amortizing loans have scheduled dates when the payments are recalculated, so that the loan will amortize over its remaining term, or have a negative amortization limit which states that when the principal balance of the loan reaches a certain contractual limit, the payments will be recalculated.

Negative Amortization Limit
A provision in certain loan contracts that limits the amount ... 
Amortization Schedule
A complete schedule of periodic blended loan payments, showing ... 
Deferred Interest
The amount of interest that is added to the principal balance ... 
Amortized Loan
A loan with scheduled periodic payments of both principal and ... 
Fully Amortizing Payment
A periodic loan payment, part of which is principal and part ... 
Negative Amortization
An increase in the principal balance of a loan caused by making ...

Credit & Loans
What is an Amortization Schedule?
An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment. 
Credit & Loans
Mortgage Basics: The Amortization Schedule
By Lisa SmithThe amortization schedule for a residential mortgage is a table that provides a breakdown of the schedule of payments from the loan's first required payment to the loan's final payment. ... 
Credit & Loans
Mortgage Amortization Strategies
Should you get a 30year mortgage? A 15year one? Ways to decide which mortgage is the best fit. 
Personal Finance
Simple Interest Loans: Do They Exist?
Yes, they do. Here is what they are – and how to use them to your advantage. 
Economics
Understanding Term Loans
A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. 
Credit & Loans
Understanding the Mortgage Payment Structure
We explain the calculation and payment process as well as the amortization schedule of home loans. 
Credit & Loans
10 Ways to Manage Student Loan Debt
How to manage those pesky payments as you embark on adult life. 
Personal Finance
4 Ways Simple Interest Is Used In Real Life
Simple interest works in your favor when you're a borrower, but against you when you're an investor. 
Credit & Loans
How Interest Rates Work On A Mortgage
A stepbystep explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off. 
Credit & Loans
Commercial Real Estate Loans
Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.

Which is better, a fixed or variable rate loan?
A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >> 
Why is more interest paid over the life of a loan when it is capitalized?
Learn what it means to capitalize interest on a loan. Understand why more interest is paid over the life of a loan when it ... Read Answer >> 
Why does the majority of my mortgage payment start out as interest and gradually ...
When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >> 
When capitalizing interest, will interest accrue while you are in a deferment?
Learn what capitalized interest is. Understand why interest accrues while a person is in a deferment, based on capitalized ... Read Answer >> 
How should you choose the amortization period for your mortgage?
Read about key considerations that homeowners should take into account before choosing the amortization period for their ... Read Answer >> 
What are the pros and cons of life insurance policy loans?
Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>