Interest On Arrears: Definition And Calculation

Let’s say you take a loan or order a shipment. According to the contractual agreement between you, you will be expected to complete payment after a due time. When you fail to meet up with that agreement in due time, it can be a payment that has fallen into arrears. 

Arrears is a financial and legal term that is used to describe the status of payments concerning late payments and their due dates. This word conveys an obligation or liability that has not been paid as of the due date. In simple terms, arrears payment is an overdue payment. What does this mean for you? When more payments have been missed based on the provisions of a specified contract, such as mora mortgage, rent payments, utility, or phone bills, the owing account can be said to be in arrears. Therefore, interest in arrears is the type paid after a period or after the expiration of the loan. 

Payments made after the expected duration are also considered to be in arrears. Often, this type of payment is earned after a service is created or completed. 

Arrears, also referred to as Arrearage in some scenarios, is also a term used to describe payments in different sectors of the industrial and financial economy, including the banking industry, credit industry, and investment world. The term’s meaning may change based on the industry and the contact it’s applied. It is commonly used for accounts such as loans and mortgages. 

For instance, if you have a loan payment of $500 that’s due for Jan 15. and you miss it, you are in arrears for the next business day. If you fail to miss a payment after that time, you are still in arrears of $500 till the outstanding amount is cleared. Also, if you made a payment of $300 on Jan 15, you are still owing arrears of $200 as of Jan 16. This outstanding balance will be charged till your account is cleared.

The Effect Of Arrears Payments

The effect of arrears is dependent on the context in which it is used. With this in mind, being in arrears may or may not negatively impact the current state of a particular account. When dealing with bonds, arrears refer to a payment made at the end of a specific period. Interestingly, mortgage interest is paid in arrears, i.e., each installment payment covers the principal and good for the last month.

What Is The Difference Between Payment In Arrears and Payment In Advance?

Whenever two parties cause content, payment is made before the service is rendered or the product is delivered. Common examples of payments made before a service include; prepaid phone bills, leases, rents, insurance payments, and internet service bills. These types of fees are referred to as Payments In Advance. When the price becomes overdue – let’s say after 30 days – the account falls into arrears, and the account holder may get a notification or penalty

There may also be cases when bills or liabilities are due after the service has been provided. Examples of these types of payments include; employee salaries, property taxes, and utility bills. These payments, also known as Payment In Arrears, come at the end of the completion of service and are not considered late payments.

Request A Quote