How is "negative amortization" defined?

The definition of "negative amortization" refers specifically to a condition where the payments made on a loan are insufficient to cover the accrued interest. As a result, the unpaid interest is added to the principal balance of the loan, leading to an increase in the total amount owed over time. This situation can occur in certain types of loans, such as some adjustable-rate mortgages, where the borrower may have initially agreed to lower payments that do not fully satisfy the interest obligation. Consequently, the borrower's debt actually grows rather than declines, which can be financially detrimental if it continues over time.

This highlights a crucial aspect of loan structures and borrower responsibility, as understanding the implications of such arrangements can significantly impact financial planning and risk management. The other choices do not accurately represent the concept of negative amortization; instead, they refer to different aspects of loan repayment and amortization.