In finance, negative amortization, also known as NegAm, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. As an amortization method the shorted amount (difference between interest and repayment) is then added to the total amount owed to the lender. Such a practice would have to be agreed upon before shorting the payment so as to avoid default on payment.

The term is most often used for mortgage loans; corporate loans which have negative amortization are called PIK loans.

Also known as deferred interest or Graduated Payment Mortgage (GPM). This method is generally used in an introductory period before loan payments exceed interest and the loan becomes self-amortizing.

Amortization refers at the process of paying off a debt (often from a loan or mortgage) over time through regular payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance. The percentage of interest versus principal in each payment is determined in an amortization schedule.

Home Mortgage Loans - An article on the different options in a home mortgage.

Negative amortization - Amortization refers to the process by which the periodic (usually monthly but could be set weekly, bi-weekly or other time period) payments are such that the loan will be paid off within the designated time period. The scheduled payment on an amortized loan is calculated such that it is large enough to cover both the interest due and an amount to reduce the balance due on the loan.

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