Accrued Interest

Full definition

Interest accrues continuously on most personal loans, even though payments are made monthly. Understanding accrual helps borrowers see exactly what they owe between billing cycles and why the exact payoff amount changes from day to day. How daily accrual works: Divide your annual interest rate (APR) by 365 to get the daily periodic rate. Multiply that by your current principal balance. That dollar figure is the interest accruing every day you carry the loan. Example: a $10,000 balance at 18% APR accrues approximately $4.93 per day ($10,000 x 0.18 / 365). When you make a monthly payment, the lender first applies it to accrued interest since the last payment, then applies the remainder to principal. Early in the loan term, a larger share of each payment goes to interest (since the principal is higher); later, more goes to principal. This is standard amortization. Payoff amounts: If you request a payoff quote, the lender calculates the current principal plus all accrued but unpaid interest up to the payoff date, plus any fees. The payoff amount increases each day you wait. Always ask for a payoff quote valid through the specific date you plan to send the final payment. If you miss a payment: Interest continues to accrue on the full balance during delinquency. Some lenders also charge a late fee. If interest is never paid, it may eventually be capitalized (added to principal), causing the balance to grow. Prepayment consideration: When you make extra principal payments, you reduce the balance on which future interest accrues, which saves money on the total interest paid over the life of the loan.

• Amortization
• Prepayment penalty
• Interest Capitalization