negative amortization

negative amortization definition - business

negative amortization

An increasing loan balance that results from payments that are less than the interest being charged on the loan. The amount by which interest exceeds each payment will be added to the balance of the loan, thus increasing interest charged in subsequent periods.

Negative amortization seems very risky. Why would a lender make a loan with negative amortization?

Like all loans, the risk a lender is willing to take is not only a factor of its loan policies, but often times may be influenced by market conditions and the need to grow a loan portfolio. That noted, as a matter of practice most lenders would not structure a loan with negative amortization. An example of when a lender would consider providing a loan with negative amortization is when the assets securing the facility are determined to have significant equity value.

Brooke Barber, Vice President, Middle Market Banking, Atlanta, GA

The American Heritage® Dictionary of Business Terms Copyright © 2009 by Houghton Mifflin Harcourt Publishing Company. Published by Houghton Mifflin Harcourt Publishing Company. All rights reserved.

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