Graduated Payment

Graduated payment

Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization.

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Graduated Payment

A system of making payments on a loan in which the payments increase gradually over the life of the loan. That is, the payments start low and increase by a certain percentage, usually 7% to 12% each year, until the full payment level is reached. When a bank determines whether to make a graduated payment loan, it only considers whether the borrower can make the low, initial payments. This allows a person who would not otherwise qualify for a loan to borrow, usually in order to buy property. The risk is the possibility that needed income will not materialize in the future, making the borrower unable to repay the loan. Graduated payment loans usually have fixed interest rates and involve negative amortization.