What Is Accrued Interest? How It Works on Loans and Savings

Accrued interest is interest that has built up since your last payment but hasn’t been paid yet. On a loan or credit card, it’s money you owe. On a savings account or bond, it’s money you’ve earned but haven’t received.

What might catch you off guard is timing: Interest often builds a little every day, even though your statement only shows it once a month. So when you pay can matter almost as much as how much you pay.

What is accrued interest?

Accrued interest is the running total of interest that’s been calculated but not yet paid out or charged. Accrue just means to build up over time.

It works in both directions:

• When you borrow, accrued interest is what you owe the lender on top of your principal, meaning the amount you originally borrowed.
• When you save, accrued interest is what the bank owes you for keeping your money there.

Once the interest is paid, charged to your account, or credited to your savings, the count resets and starts building again.

Read more >> How Do Interest Rates Work?

How accrued interest works

Every interest-bearing account has an annual rate, but lenders and banks rarely wait a full year to apply it. In many cases, they split the annual rate into a daily rate and apply it to your balance each day. What happens next depends on whether the account uses simple or compound interest.

Simple interest accrual

With simple interest, interest builds only on your principal. The interest that’s piled up doesn’t earn interest of its own.

How it works

Say you have a $5,000 personal loan at 8% simple interest. Each day, about $1.10 in interest builds up ($5,000 x 0.08 ÷ 365). After 30 days, that adds up to about $32.88.

Since interest adds up every day, timing works in your favor. Paying a few days early usually means a little less interest builds before your payment arrives.

Your loan agreement should say whether your loan uses simple interest. If it doesn’t, confirm it with your lender and ask whether it’s calculated daily.

Compound interest accrual

With compound interest, the interest that builds up gets added to your balance. Then that interest starts earning interest too. How often that happens, whether daily, monthly, or yearly, is called the compounding frequency.

Compounding helps you when you’re saving and costs you when you’re borrowing. Credit cards are a common example. Some card companies use a daily periodic rate, which is your APR split into a daily rate. Each day’s interest is added to the balance, so interest compounds on a daily basis.

How it works

Imagine a $1,000 credit card balance at 24% APR. You make no payments, add no new purchases, and pay no fees. Here’s what simple and daily compounding interest would each add over time:

Real card balances also include minimum payments, so your numbers will be different.

Read more >> What's the Difference Between APR and APY?

Common examples of accrued interest

Accrued interest shows up anywhere money is borrowed or saved over time. These are the places you’re most likely to see it.

Credit cards

Many card companies calculate the interest you owe daily, based on your average daily balance. If your card has a grace period, or the window between the end of a billing cycle and your due date, paying your full balance by the due date can mean no interest on new purchases.

Cash advances are different: They generally start charging interest on the day you receive your money.

Student loans

Interest on student loans accrues daily, in most cases starting the day your loans are disbursed. With a subsidized federal loan, the government pays the interest during certain periods, such as while you’re enrolled at least half time. With an unsubsidized loan, you’re responsible for the interest from the start.

On $10,000 in student loans at 3.65%, about $1 in interest builds up each day, or $365 over a year. If you don’t pay it, that interest may be capitalized, meaning added to your principal. Then your principal becomes $10,365, and your daily interest goes up with it.

Capitalization rules depend on your loan type, and rules have changed in recent years, so check with your loan servicer or at StudentAid.gov for the rules that apply to you.

Auto loans, personal loans, and mortgages

These are installment loans, meaning you borrow a set amount and pay it back in a fixed number of regular payments. Each payment usually covers the interest that’s built up since your last payment first, and the rest goes toward your principal. As your balance shrinks, less interest builds up and more of each payment goes to principal, a process called amortization.

Say you take out a $20,000 auto loan at 7% for five years, with a monthly payment of about $396. Your first payment puts about $117 toward interest, but by your last payment, only about $2 goes to interest. That’s why early payments on a new loan can feel like they barely chip away at the balance.

If your budget has room, paying extra toward principal shrinks the balance that interest builds on. In the same example, an extra $50 a month would pay off the loan about seven months early and save about $508 in interest. Ask your lender to apply extra payments to principal, and check whether your loan has a prepayment penalty, a fee some lenders charge if you pay off all or part of a loan early.

Bonds

A bond is a loan you make to a company or government. In return, it pays you interest, often twice a year. Say you own a $1,000 bond that pays 5% a year, split into two $25 payments.

If you sell that bond three months after a payment, you’ve earned about half of the next $25. So the buyer pays you about $12.50 in accrued interest on top of the bond’s price.

When the next payment arrives, the buyer collects the full $25, which covers what they paid you.

Savings accounts

Savings accounts, certificates of deposit (CDs), and money market accounts accrue interest you earn. The bank calculates it on a set schedule and credits it to your account, often monthly or quarterly. Once it’s credited, it starts earning interest too.

That’s why banks advertise APY, or annual percentage yield. APY includes the effect of compounding, so it’s the better number to compare across accounts. For example, $1,000 at 4% interest compounded monthly grows to about $1,040.74 after a year, which works out to an APY of about 4.07%.

One thing to ask before you close or switch accounts is whether interest that’s accrued but hasn’t been credited will be paid out. The answer can vary by bank.

Read more >> Principal vs. Interest: How It Works for Credit Cards and Loans

How accrued interest affects your finances

On debt, accrued interest is the main reason a balance costs more the longer it sits. On savings, it’s how your money grows without you adding more.

A few effects are worth knowing:

• Your payoff amount isn’t your statement balance. When you pay off a loan early, the lender adds interest accrued up to the payoff date. Ask for a payoff quote that’s good through a specific date, so you pay the right amount the first time.
• Interest can become part of your balance. On a credit card, interest that’s charged gets added to what you owe. That can raise how much of your available credit you’re using, which is part of the amounts owed category in your FICO Score. Kikoff’s credit monitoring shows that number as your balance changes.
• Your rate sets the pace. The higher the rate, the faster interest accrues on every dollar. On credit cards and many loans, the rate you’re offered depends partly on your credit.

‍What if your balance keeps growing even though you’re paying? If your payment doesn’t cover the interest that’s accrued, the unpaid interest can be added to what you borrowed, so the amount you owe goes up. This is called negative amortization.

Call your lender or loan servicer and ask how much of each payment goes to interest and what your options are. Talk with a nonprofit credit counselor for guidance specific to your situation. The National Foundation for Credit Counseling (NFCC) can connect you with free or low-cost counseling at 800-388-2227.

How to calculate accrued interest

You can estimate accrued interest with three numbers from your statement or account agreement: your rate, your balance, and the number of days. Say you carry a $2,000 credit card balance at 22% APR for 30 days.

• Find your annual rate. That’s the APR on a credit card or loan, or the interest rate on a savings account. In this example, it’s 22%.
• Turn it into a daily rate. Divide the rate by 365. Here, 0.22 divided by 365 comes to about 0.06% a day. (Some lenders divide by 360 instead, so check your agreement.)
• Find your daily interest. Multiply the daily rate by your balance. On $2,000, that’s about $1.21 a day.
• Multiply by the number of days since your last payment, or since interest was last credited. Over 30 days, you’ve accrued about $36 in interest.

Put together, the formula looks like this:

Accrued interest = Balance × (Annual rate ÷ 365) × Days

This gives you a close estimate. Your actual interest may be a little different if your card compounds daily or your balance changes during the month, and your statement shows the exact amount.

Read more >> How to Avoid Credit Card Interest

Bottom line

Accrued interest is interest that’s built up but hasn’t been paid yet, and on most cards and loans it builds every day. Paying sooner, paying more than the interest that’s due, and paying card balances in full when you can all keep it from growing.

The other lever is your rate, since it sets how fast interest accrues in the first place. On credit cards and many loans, that rate depends partly on your credit history. Kikoff’s Credit Account reports your on-time payments to all three credit bureaus, helping you build the payment history lenders look at. There’s no credit check to sign up, and plans start at $5 a month.