Negative amortization is technique to repay the loan if actual interest is more than loan. At that time, we calculate the difference between interest and loan and net difference will add in principle amount and it will be paid to lender.
Why has negative Amortization happened?
Like PIK loan, negative amortization is to reduce the loss of lender. If company is unable to repay the loan with interest regularly, then some of amount of interest will be outstanding and its capitalized value will be negative amortization.This negative amortization payment may be paid period between 15 to 30 years if amount is so big.
Negative Amortization and its Importance
While it can help with cash flow for some, for others it can harm your balance because of misleading teaser interest rates.