Accrued interest

A statement closes on one date, but a payment may reach the lender on another. When a balance continues to accrue interest, the amount needed to clear the debt can grow between those dates. That gap explains why an earlier statement balance may not settle a loan, or why a later card statement can contain interest from before a payment was credited.

In a sentence

• "The payoff includes $60 of accrued interest along with the $10,000 principal."
• "Paying the accrued interest covers the borrowing cost, not the principal."
• "I need the accrued interest through the date my payment will be credited."

How it's calculated

Accrued interest depends on the principal, the interest rate, and the calculation method in your agreement. For a simple-interest loan with no earlier unpaid interest, an unchanged principal balance, and a 365-day convention, the calculation is:

Accrued interest = principal × annual interest rate × days accrued ÷ 365

1. Write the annual rate as a decimal, so 7.30% becomes 0.073.
2. Count the interest-accruing days after the date through which interest was last paid, using the agreement's counting method.
3. Multiply the principal by the annual rate and the day count, then divide by 365.
4. If the principal or rate changes, calculate each interval separately and add the results, along with any earlier interest still unpaid.

The formula is one method, not a rule for every debt. Agreements can use different day-count conventions and balance methods, so the lender's calculation may differ from this example.

An example

Suppose you owe $10,000 on a simple-interest loan at 7.30% annually, using a 365-day year. Start just after all earlier interest has been paid, and assume no principal changes, fees, or additional payments before payoff. Daily interest is $10,000 × 0.073 ÷ 365 = $2.

The ten additional days add $20 of interest, making the payoff $10,060 rather than $10,040. The difference is interest for the extra borrowing time, not a late fee or an increase in principal.

Why it matters

Accrued interest makes the payment date part of the payoff calculation. A dated loan payoff amount tells you what is needed to satisfy the loan on a specified date, including applicable interest and charges. Check the quote's good-through date and payment-arrival instructions rather than assuming an old balance is enough.

Accrued interest also explains the split within a payment. A payment applied to unpaid interest covers a borrowing cost; only the portion applied to principal reduces the principal balance. Treating the whole payment as principal overstates how much principal you have retired.

Accrued interest versus deferred interest

Accrued interest describes interest already accumulated and unpaid; deferred interest describes a promotional arrangement with conditions that determine whether accumulated interest is waived or charged. The terms describe different things and can apply to the same balance. Under a deferred-interest promotion, interest can accumulate during the promotional period and be waived if you meet the required conditions. Ordinary loan interest does not need a promotion to accrue.

Common questions

Is accrued interest always shown on my statement? No. A statement is a snapshot, and interest can accumulate after its closing date. Interest already listed on a statement is also accrued interest while it remains unpaid.

Why can interest appear after I pay off a credit card? If your balance was accruing interest, more interest may accumulate between the statement closing date and the date your payment is credited, then be billed later as residual or trailing interest. Paying the displayed balance does not necessarily cover that unbilled amount.

Does accrued interest become principal? Not automatically. Unpaid interest and principal are different amounts. If your agreement and applicable rules allow capitalization, unpaid interest can be added to principal, and future interest may then be calculated on that larger principal.

Does paying accrued interest reduce principal? A payment used to cover accrued interest pays a borrowing cost rather than reducing principal. Check how the lender allocates your payment between interest, principal, and any fees instead of assuming the full payment comes off principal.

Go deeper

• Why is my loan payoff amount higher than my statement balance? explains how interest through a later payment date and applicable charges change a dated payoff quote.
• Why am I still being charged interest after paying off my credit card? follows interest that accrues before payment but appears on a later statement.
• The Loan calculator estimates monthly payments, total interest, and how much sooner a loan ends with extra monthly payments.