An increase in the principal balance of a loan which occurs when the monthly payments do not cover all of the interest costs. The interest costs, which are not covered by the monthly payment, are added to the unpaid principal balance. This can arise when there is a payment cap on an ARM loan. If the interest rate increases and the cap prevents the borrower from making larger payments to keep pace with the increase, the additional interest on interest is added to the loan's principal. Thus, over a period of time, the loan's balance can increase rather than decrease, as is normally the case.