Accrued Interest

Accrued interest is interest that has accumulated on a loan, deposit, or bond but has not yet been paid to, or by, the party entitled to it. It arises because interest is almost always calculated continuously, typically daily, on an outstanding balance, while actual payment happens only periodically, such as monthly on a mortgage or at coupon dates on a bond.

The concept applies in two directions. A borrower accrues interest they owe on a loan balance between payment dates, and that accrued amount is added to what is due at the next instalment. A saver or bondholder accrues interest they are entitled to receive on a deposit or bond between the dates interest is actually credited or paid out, which means the account's true economic value is often slightly higher than its last displayed statement balance.

Interest does not wait politely for the next statement date to start existing; it builds up every single day, whether or not anyone writes it down yet. Accrued interest is simply the running tally of that daily build-up since the last time it was actually paid or added to the account.

Most retail accounts use a simple daily calculation:

• $\text{Principal}$ is the outstanding balance on which interest is charged or earned.
• $\text{Annual rate}$ is the stated yearly interest rate.
• $\text{Number of days}$ is the days elapsed since interest was last paid or credited.

For example, on a loan balance of 200,000 at an annual rate of 6 percent, interest accrues at roughly 32.88 per day, so after 15 days without a payment, about 493.15 has accrued and will be added to the next bill.

When a bond is sold between coupon dates, the buyer compensates the seller for the interest that accrued since the last coupon payment, because the buyer will receive the full next coupon even though they did not hold the bond for the whole period. This amount is added to the bond's quoted price to produce the total price the buyer actually pays, sometimes called the dirty price, as distinct from the clean price quoted in most market data feeds.

Understanding accrued interest explains why paying off a loan early, even by a few days, reduces the total interest cost, and why a savings account's displayed balance can understate what has actually been earned until the next crediting date. It is also central to how banks calculate payoff figures for closing a loan, since any accrued but unpaid interest must be settled in addition to the outstanding principal when a borrower requests a final payoff statement.

Credit card issuers calculate accrued interest daily on any carried balance, which is why paying only the minimum due still allows a meaningful amount of interest to build up between statements. A cardholder who pays the full previous balance before the due date generally avoids this accrual on purchases entirely, since the grace period suspends interest on new spending as long as the prior cycle closed at zero.

Money market funds and some cash management accounts accrue interest daily but credit it only monthly, meaning the account's true value is technically higher than its displayed balance between crediting dates, a detail that matters mainly when closing or transferring the account partway through a period.

Many lenders now display accrued interest separately on online account dashboards, letting a borrower see in real time how much interest has built up since the last payment, a level of transparency that was rare before online banking made daily balance tracking practical for everyday consumers.

For some savings products, tax authorities require interest to be reported as income in the year it accrues rather than the year it is actually paid out, which can create a mismatch between when a saver owes tax on interest and when they actually receive the cash to pay that tax, a detail worth checking for longer-term fixed deposits in particular.