Accrued interest is the interest that has built up on a loan or investment since the last payment date but hasn’t yet been paid or received. It accumulates every day, quietly, between scheduled payments. That daily build-up is why your mortgage payoff quote comes in higher than last month’s statement balance, why a bond costs more than its quoted price when you buy it between coupon dates, and why a savings account can generate taxable income you never actually withdrew.
How It Builds Up Between Payments
Interest doesn’t wait for payment dates. It starts the moment a loan is funded or an investment begins earning, and it grows continuously until the next scheduled payment. Lenders and financial institutions record the accumulating amount as it’s earned or owed, not when cash changes hands.
From the borrower’s side, that growing number is a liability. From the lender’s or investor’s side, it’s an asset. Either way, the mechanism is the same: a daily interest amount, often called a per diem, is added to the balance for every day that passes. Ask your lender for a payoff quote on Monday and settle on Friday, and you’ll owe four more days of per diem interest than the quote showed. That’s also why payoff quotes carry an expiration date.
How Accrued Interest Is Calculated
The basic formula is principal multiplied by the annual interest rate, multiplied by the fraction of the year that has passed. The fraction is where the details live, because lenders don’t all agree on how long a year is for interest purposes.
Day Count Conventions
Three conventions cover most consumer and institutional lending:
- Actual/365 uses the actual number of days in each month and divides by 365. It’s common for personal loans and savings accounts.
- Actual/360 uses the actual number of days in each month but divides by 360. Because the denominator is smaller, this method produces slightly more interest than Actual/365 at the same stated rate. It’s standard for many commercial and corporate loans.
- 30/360 treats every month as 30 days and every year as 360. It’s often used for corporate and municipal bonds.
The difference is small on a small balance and significant on a large one. On $10,000 at 5% for 30 days, Actual/365 produces about $41.10 in interest and Actual/360 produces about $41.67. Scale that same gap up to a multi-million-dollar commercial loan running for years, and the choice of convention moves thousands of dollars.
Simple Versus Compound
Simple interest accrues only on the original principal. Borrow $10,000 at 5% simple interest and you owe $500 a year in interest, regardless of whether earlier interest has been paid. Most auto loans and many short-term personal loans work this way.
Compound interest accrues on the principal plus any previously accumulated interest that hasn’t been paid off. The more frequently interest compounds, the faster the total grows. A savings account compounding daily earns slightly more than one compounding monthly at the same stated rate because each day’s interest is folded into the balance and starts earning its own interest the next day. Credit cards, mortgages, and many student loans use some form of compounding, which is why the effective cost usually runs higher than the stated annual rate suggests.
What Accrued Interest Costs Borrowers
Mortgage Payoff Amounts
When you sell your home or refinance, the payoff on your mortgage is higher than the principal balance on your last statement. The lender adds a per diem charge for every day from your last payment through the expected payoff date. On a $400,000 mortgage at 6%, the daily charge runs about $65.75. Close five days into a new cycle and roughly $329 in accrued interest sits on top of the remaining principal. If closing slips, the lender recalculates with additional per diem days.
Student Loan Capitalization
Student loans are where accrued interest tends to surprise borrowers most. Interest continues to accumulate during periods when you’re not making payments: while you’re in school, during a grace period, or in deferment or forbearance. On unsubsidized federal loans, no one covers that interest for you.
The real sting comes from capitalization. When certain events occur, the servicer takes the unpaid interest that has piled up and adds it to the principal. From that point forward, interest is calculated on the higher balance, so you’re paying interest on interest.1Consumer Financial Protection Bureau. Tips for Student Loan Borrowers For federal Direct Loans held by the Department of Education, capitalization now happens in only two situations: when a deferment ends on an unsubsidized loan, or when you leave an Income-Based Repayment plan or no longer qualify for reduced payments under it.2Nelnet – Federal Student Aid. Interest Capitalization
The numbers add up quickly. On a $10,000 unsubsidized loan at 6.8%, about $340 in interest accrues during a six-month deferment with no payments. Once capitalized, future interest is charged on $10,340 rather than $10,000, and the daily interest amount rises accordingly. Across a 10- or 20-year repayment period, that compounding adds real cost.
Credit Cards
Credit card issuers typically calculate interest using your average daily balance and a daily periodic rate equal to your APR divided by 365. Each day, the issuer multiplies your balance by that daily rate, and the result is added to what you owe.3Consumer Financial Protection Bureau. How Does My Credit Card Company Calculate the Amount of Interest I Owe Because interest accrues daily rather than monthly, paying down part of a balance mid-cycle actually reduces the total interest charged for that period. Waiting until the due date to make one big payment costs more than splitting it into earlier, smaller payments.
When a Payment Doesn’t Cover the Interest
Negative amortization happens when your payment doesn’t even cover the interest that accrued since the last payment. The shortfall is added to your principal, so you end up owing more than you originally borrowed even though you’ve been paying on time.4Consumer Financial Protection Bureau. What Is Negative Amortization It most commonly appears in adjustable-rate mortgages with payment caps and in income-driven student loan plans where the calculated payment is less than the monthly interest.
Federal law requires mortgage lenders to disclose upfront whether a loan may result in negative amortization and to explain that it increases principal and reduces equity in the home.5Office of the Law Revision Counsel. 15 USC 1639c – Minimum Standards for Residential Mortgage Loans Loans that allow it also can’t qualify for the “qualified mortgage” safe harbor, which is one reason they’re much less common now than before 2008.
What Accrued Interest Means for Investors
Buying Bonds Between Coupon Dates
When you buy a bond on the secondary market between its scheduled interest payments, you owe the seller for the interest that built up while they held it during that payment period. They earned it by owning the bond and shouldn’t lose it just because they sold before the next coupon arrived. So you pay the market price plus accrued interest, and when the next full coupon payment arrives, you receive the entire payment, which effectively reimburses you for the accrued interest you fronted.
The Municipal Securities Rulemaking Board prescribes standard formulas for computing accrued interest in bond transactions, counting the actual days from the previous interest payment date up to (but not including) the settlement date.6MSRB. Rule G-33 Calculations Treasury securities follow the same logic.7TreasuryDirect. Buying a Treasury Marketable Security
Bond prices are often quoted two ways. The clean price excludes accrued interest and is what you’ll see on most financial news screens. The dirty price, sometimes called the full price, includes accrued interest and reflects what the buyer actually pays at settlement. The distinction matters because the clean price shows the bond’s market value without the noise of where you happen to be in the coupon cycle.
Original Issue Discount and Phantom Income
Zero-coupon bonds and other instruments issued below face value create a tax situation that surprises many investors. These bonds don’t make periodic interest payments. You buy them at a discount and receive the full face value at maturity. The IRS treats the difference as original issue discount, or OID, and considers a portion of it taxable interest income each year, even though you haven’t received any cash.8Internal Revenue Service. Guide to Original Issue Discount (OID) Instruments
This phantom income catches people off guard because you owe tax on interest you haven’t collected. If the OID for the year is $10 or more, your broker sends you a Form 1099-OID. The offset: each year’s OID inclusion increases your cost basis in the bond, so you won’t be taxed on it again at maturity. Small loans between individuals of $10,000 or less are exempt from the OID rules, as are U.S. savings bonds and tax-exempt municipal obligations.8Internal Revenue Service. Guide to Original Issue Discount (OID) Instruments
Reporting Accrued Interest at Tax Time
Most individual taxpayers use the cash method, which means you report interest income when you actually receive it or when it’s credited to an account you can withdraw from without penalty. The IRS treats a credited amount as “constructively received” even if you never touch it.9Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses Interest that posts to your savings account in December is taxable that year, even if you leave it there until March.
Financial institutions send a Form 1099-INT when they pay you $10 or more in interest during the year. You report these amounts on Schedule B if your total taxable interest exceeds $1,500.10Internal Revenue Service. Topic No. 403, Interest Received Interest below the 1099 threshold is still reportable and taxable.
Bond buyers get an important adjustment. If you paid accrued interest to the seller when you bought a bond between coupon dates, you can subtract that amount from the first interest payment you receive. On Schedule B, you list the full interest payment, then enter “Accrued Interest” below it and subtract what you paid the seller, so you’re taxed only on the interest that accrued while you actually owned the bond.9Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
Disclosure Protections You Can Rely On
Federal law doesn’t leave you to guess at the math. The Truth in Lending Act and its implementing regulation (Regulation Z) require lenders to disclose the finance charge, annual percentage rate, and the method used to calculate interest before you sign.11Consumer Financial Protection Bureau. 12 CFR 1026.18 – Content of Disclosures If a lender uses an Actual/360 day count, the higher resulting finance charge and APR have to appear in those disclosures.
For open-end credit like credit cards and home equity lines, each monthly statement must itemize the interest charged during the billing cycle, show totals for the period and the calendar year to date, display the applicable APR, and identify the balance on which interest was calculated.12eCFR. 12 CFR 1026.7 – Periodic Statement Those line items are enough to verify the math and catch errors before they compound.
One More Place It Shows Up: Court Judgments
Accrued interest isn’t limited to loans and investments. When a court awards a money judgment, interest accrues on that amount until it’s paid. In federal court, post-judgment interest is calculated at a rate equal to the weekly average one-year constant maturity Treasury yield for the week before judgment, compounded annually, running from the judgment date until the losing party pays.13Office of the Law Revision Counsel. 28 USC 1961 – Interest State courts apply their own statutory rates, which typically range from about 4% to well over 10% depending on jurisdiction and case type. For anyone on either side of a judgment, the accruing interest is often a stronger push toward settlement than the judgment itself.