Which term describes a loan where the payment is less than the total interest due?

A loan where the payment is less than the total interest due is referred to as a negative amortization loan. In this type of loan arrangement, borrowers make monthly payments that are insufficient to cover the interest accruing on the outstanding principal balance. As a result, the unpaid interest is added to the principal balance, increasing the total debt over time. This situation can occur in various types of loans, particularly in adjustable-rate mortgages or certain promotional loan products where lower initial payments are offered.

Recognizing negative amortization is crucial because it can lead to a scenario where the borrower owes more than what was originally borrowed, potentially causing financial strain in the long term. It's essential for borrowers to fully understand the terms of any loan that might involve negative amortization to ensure they are prepared for the implications of such financial arrangements.