Negative Amortization

Posted in Finance, Accounting and Economics Terms, Total Reads: 1346

Definition: Negative Amortization

When the principle balance of the loan amount increases because of the smaller EMI as compared to the interest amount, it is called as Negative Amortization. The remaining amount of the interest is added to the principle amount of the loan which makes the borrower to pay more that what he actually borrowed.

For example: Mr. X borrowed $50000 from bank Y @10% rate of interest per annum. The EMI for 1st year is 400 $ per month which means 4800 $ in 1st year whereas the interest for year 1 is 5000 $, hence the balance that is 200 $ will get added to the principle and it will get added and the new peinciple at the end of year 1 will become 50200 $.

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