US Rule vs. Normal, or Negative Amortization
- US Rule: Unpaid interest and late fees are escrowed, or banked, and added to the end of the loan.
- Normal: Unpaid interest and late fees are added to the loan's principal balance in the payment period they occur. This results in charging interest on unpaid interest and fees, which is commonly referred to as Negative Amortization (What is negative amortization?, Consumer Financial Protection Bureau).
From the borrower's perspective, negative amortization can be very costly -- especially if the missed payment occurs early on in the repayment schedule. The following mini calculator helps to illustrate this point.