Final answer:
A loan that has payments not covering monthly interest, leading to a growing loan balance, is known as a negative amortization loan. It's important in the context of business, especially banking and finance, affecting both consumers and institutional risk management.
Step-by-step explanation:
A loan in which the required monthly payment is not sufficient to cover the monthly interest that is due is known as a negative amortization loan. This situation occurs when the payment made by the borrower is less than the interest charged on the loan, resulting in the unpaid interest being added to the principal balance, which causes the loan balance to increase over time. Loans & Interest, as well as specific types like Home Loans and Auto Loans, are crucial in the banking and finance industry, informing both consumer decisions and bank risk management. It's important for borrowers to fully understand the terms of their loans, including the interest rates and payment schedules, to avoid the pitfalls of negative amortization. A well-run bank anticipates the risk of loan defaults and incorporates this into their financial planning, but increased defaults can still pose a risk to the bank's stability.