DEFINITION of 'Non-Amortizing Loan'

A type of loan in which payments on the principal are not made, while interest payments or minimum payments are made regularly. As a result, the value of principal does not decrease at all over the life of the loan. The principal is then paid as a lump sum at the maturity of the loan.

BREAKING DOWN 'Non-Amortizing Loan'

Examples of non-amortizing loan agreements are balloon mortgages and deferred interest programs.

With balloon mortgages, the payments do not pay off the loan. They are calculated as if the loan were due in 25 to 30 years, but in actuality the loan is due in five to seven years. The loan can then be renewed if periodic payments have been made on time. Deferred interest programs occur when payment of interest is left until the loan is due.

The problem that arises with balloon mortgages is that month over month you will find the balance of your loan increasing, instead of getting smaller.

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