What is true about negative amortization?

Negative amortization occurs when the payments made on a loan are less than the interest charged, resulting in the loan balance increasing over time instead of decreasing. This method of loan structuring can indeed be associated with predatory lending practices. Predatory lending takes advantage of borrowers, particularly those who may be less financially knowledgeable or in a desperate economic situation, by offering loans that prioritize the lender's benefit while placing the borrower in a detrimental financial position.

When a borrower is placed in a negative amortization situation, they may find themselves under more financial strain as their loan balance grows rather than shrinks, leading to long-term issues such as difficulty in paying off the loan or securing favorable refinancing options. This aspect of negative amortization is particularly concerning as it can ensnare borrowers in a cycle of debt, which is a hallmark of predatory lending practices.

The other options do not accurately describe the nature of negative amortization: it does not lead to a decrease in the principal, is generally not recommended by lenders due to its risky implications, and while it may initially lead to lower payments, those payments can become unsustainable over time, exacerbating the financial burden on the borrower.