What is it called when the full interest expense is not paid and is instead deferred, increasing the total amount owed?

The correct term for when the full interest expense is not paid and is instead deferred, leading to an increase in the total amount owed, is known as negative amortization. This occurs typically when a borrower makes payments that are less than the accrued interest on a loan. As a result, the unpaid interest is added to the principal balance, which can lead to a situation where the total debt owed increases over time rather than decreasing as it would with regular amortization.

For instance, in the context of some adjustable-rate mortgages or certain types of personal loans, if the payments received are lower than the interest due, the deficiency gets tacked onto the principal. Consequently, the borrower ends up owing more than they initially borrowed.

In contrast, other options refer to different concepts. "Interest Only" refers to payment plans where only the interest is paid for a period without addressing the principal. "Capitalization" typically refers to the process of converting expenses into capital or increasing capital through funds. "Principal Increase" denotes a rise in the principal amount borrowed, but it lacks the specificity of relating to deferred interest payments.