Listen to a Business English Dialogue About Negative amortization
Katherine: Hi Eric, do you know what negative amortization means in finance?
Eric: Hey Katherine, yes, it’s when the principal balance of a loan increases rather than decreases because the borrower’s payments are insufficient to cover the interest.
Katherine: Right, so it’s like when the interest accrued on the loan exceeds the amount the borrower is paying?
Eric: Exactly. It can happen with certain types of loans, like adjustable-rate mortgages, where the interest rate can fluctuate over time.
Katherine: I see. So, negative amortization can lead to larger loan balances and higher payments down the line?
Eric: Yes, that’s correct. It’s important for borrowers to understand the potential risks associated with negative amortization when considering certain types of loans.
Katherine: Got it. So, what are some strategies borrowers can use to avoid negative amortization?
Eric: One strategy is to make larger payments than the minimum required to ensure that the loan balance decreases over time.
Katherine: Makes sense. So, paying more than the minimum can help prevent the loan balance from growing?
Eric: Exactly. It’s important for borrowers to carefully review loan terms and understand how payments are applied to avoid negative amortization.
Katherine: Thanks for explaining, Eric. It’s clearer to me now how negative amortization works in finance.
Eric: You’re welcome, Katherine. I’m glad I could help clarify it for you. If you have any more questions, feel free to ask.