Negative amortization occurs when payments do not cover all accruing interest, causing the loan balance to increase. Which option best describes this concept?

• A. When payments exceed accruing interest
• B. When payments do not cover all accruing interest, causing the loan balance to increase
• C. When payments are fixed and fully amortizing
• D. When interest is waived for a period

Answer: (B)

Negative amortization happens when the payment made isn’t enough to cover the interest that accrues in the period. The unpaid interest is added to the loan principal, so the balance grows instead of shrinking. This is exactly what the described option conveys: payments don’t cover all accruing interest, causing the loan balance to increase. The other ideas describe situations that would either reduce the balance (paying more than the interest) or fully amortize the loan, or involve a temporary waiver of interest, which isn’t the defining feature of negative amortization.