Negative amortization occurs when payments do what relative to accruing interest?

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Multiple Choice

Negative amortization occurs when payments do what relative to accruing interest?

Explanation:
Negative amortization happens when the payment made on a loan doesn’t cover the interest that accrues during the period. When the payment is smaller than the interest, the unpaid interest is added to the loan balance, so the principal increases. If payments were exactly equal to the interest, the balance would stay the same; if payments exceeded the interest, the balance would shrink. The idea of eliminating interest isn’t how loans typically work—the interest would still accrue and either be paid or capitalized.

Negative amortization happens when the payment made on a loan doesn’t cover the interest that accrues during the period. When the payment is smaller than the interest, the unpaid interest is added to the loan balance, so the principal increases. If payments were exactly equal to the interest, the balance would stay the same; if payments exceeded the interest, the balance would shrink. The idea of eliminating interest isn’t how loans typically work—the interest would still accrue and either be paid or capitalized.

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