How do I Convert Interest to Debt?

Negative amortization leads to greater loan payments.

The quickest way to convert interest into debt is to not pay the interest payment. When you have a loan, the loan payments have two components, interest and principal. If you do not pay the full amount of the payment, then the lender will normally apply your payment to interest first and the remaining amount to principal. If you do not pay enough money to cover your interest expense, the interest then turns into principal and you have negative amortization.

Things You'll Need

• Loan amortization table

Instructions

1. Use a loan amortization table to see how much of your payment each month applies to interest and how much applies to principal. For example, a person owes a monthly payment of $1,000 on his loan. For this month, $800 goes to interest and $200 goes toward principal.

2. Apply any amount you do pay first to the interest, then towards the principal. In the example, if the person only pays $400, then the person still owes $400 of interest and $200 of principal.

3. Add the amount of unpaid interest to the amount of principal remaining on the loan. In the example, if during that month, the person owed a total of $48,000 in principal, you now add $400 to the principal, so the person now owes $48,400 of principal. This converts the interest you should have paid now to additional debt.

References

• Federal Reserve: Consumer Handbook on Adjustable Rate Mortgages
• Investopedia: Negative Amortization Definition