What is one characteristic of negative amortization?

Negative amortization occurs when the payments made on a loan are not sufficient to cover the interest that accrues during a specific period. As a result, the unpaid interest is added to the principal balance of the loan, causing it to increase over time. This means that instead of the borrower reducing their debt, they end up owing more than they initially borrowed. In a negative amortization scenario, the borrower may be making regular payments, but those payments do not adequately address the total interest due, leading to an escalation of the loan balance. This characteristic distinctly identifies negative amortization as a risky financial situation for borrowers because it can result in significant increases in debt over time.