What is a core feature of negative amortization?

Negative amortization occurs when loan payments are insufficient to cover the interest due on the loan, resulting in the unpaid interest getting added to the principal balance. This means that instead of decreasing, the loan balance actually increases over time, as the borrower is essentially accumulating more debt rather than reducing it.

When a borrower makes payments that do not cover the accrued interest, this "uncovered" amount is tacked onto the principal, leading to a larger overall balance owed at the end of the payment period. This is a significant risk for borrowers as they may find themselves owing more than the original amount borrowed.

In contrast, decreasing loan balances and consistent payments would typically indicate a standard amortizing loan where payments are structured to pay down the principal directly. Similarly, increased equity is not a characteristic of negative amortization; rather, it reflects a growing ownership interest in a property usually seen in traditional loan setups where the borrower makes sufficient payments to cover both interest and principal.