What is "negative amortisation" in loan apps?

Negative amortisation is when your loan balance increases even though you are making payments. You owe more after paying than you did before.

The Consumer Financial Protection Bureau (CFPB) explains it clearly: "Negative amortization means that even when you pay, the amount you owe will still go up because you are not paying enough to cover the interest" .

Let me explain with an example.

Normal loan (positive amortisation):

• Balance: ₦100,000
• Monthly interest: ₦10,000
• Your payment: ₦15,000
• ₦10,000 covers interest, ₦5,000 reduces principal
• New balance: ₦95,000 (you owe less)

Negative amortisation loan:

• Balance: ₦100,000
• Monthly interest: ₦10,000
• Your payment: ₦8,000 (this is what the app lets you pay)
• ₦8,000 is less than the ₦10,000 interest owed
• Unpaid interest (₦2,000) is added to your balance
• New balance: ₦102,000 (you owe MORE)

How Negative Amortisation Is Used

The CFPB warns that some lenders offer "minimum payments" that are too low to cover the interest. They make the payment seem affordable, but your debt keeps growing. After a period of time, you will have to start making much higher payments .

The danger: You can end up owing far more than the original loan amount – sometimes more than your collateral is worth .

Real Example from the UK Market

The FCA has addressed this indirectly. For high-cost short-term credit, if a borrower makes an early repayment, the amount of credit outstanding for the purpose of calculating the cost cap does NOT reduce to reflect the repayment . In practice, this creates a structure where early repayment doesn't benefit the borrower as much as it should.

Step-by-Step Action

Step 1: Check if your loan allows "minimum payments" that are less than the monthly interest.

Step 2: Calculate: Monthly interest = Principal × (APR ÷ 12). If your minimum payment is less than this, you are in negative amortisation.

Step 3: If you are in negative amortisation, increase your payment immediately. Pay at least the interest each month.

Step 4: Avoid any loan that specifically advertises "low minimum payments" without explaining the interest calculation. This is a classic trap.

Step 5: The CFPB advises: "To keep your debt from growing, try to pay down all of the interest and at least some of the principal you owe"