Example of negatively amortized note

Borrower Gonzalez took out a loan for $100,000 at 10% payable interest per annum.  Every month she pays $740 towards the loan.  This is what type of note?

  1.  installment note
  2.  negatively amortized note
  3.  straight note
  4.  adjustable rate note

The answer is B.  This problem requires some math before we choose an answer – even though at first glance it seems like no math is required.  If a borrower takes out a $100,000 loan at a 10% interest rate, this means that the interest alone is $10,000 a year, or $10,000/12 = $833.33 a month.

Since Gonzalez is only paying $740 a month, which is less than the interest payment of $833.33, this is clearly a negatively amortized note – which, by definition, is a note where the monthly payment is less than even the interest payment.