Which of the following defines the term negative amortization?

The concept of negative amortization occurs when the payments made on a loan are insufficient to cover the interest that accrues over a given period. In such cases, the unpaid interest is added to the remaining loan balance, causing it to increase rather than decrease. This can lead to a situation where the borrower owes more at the end of the payment period than they did at the outset, despite making regular payments.

This explanation ties directly into the nature of the loan's structure where the borrower might be on an adjustable-rate mortgage or a loan with lower initial payments that don’t fully account for the accrued interest. Over time, this can put the borrower in a more challenging financial position.

The other options describe different scenarios that do not accurately reflect the mechanism of negative amortization. For instance, the idea of only paying principal does not align with the concept of negative amortization, and a loan balance decreasing with each payment is the opposite of what happens in negative amortization situations.