Definition of Accrued Interest
Accrued interest is the interest accumulated on a loan that has yet to be paid by the borrower. In real estate, accrued interest refers to the amount of mortgage interest that has been earned but not yet paid. That’s because mortgages are paid in arrears, which means that the interest due on the balance accrues before a payment is made. Each payment covers the accrued interest first, and anything left is applied toward the principal balance.
Why is this term important?
For borrowers, accrued interest can be listed as an expense on an income statement as well as a liability on a balance sheet. For lenders, accrued interest can be listed as revenue on an income statement as well as an asset on its balance sheet. Other than loans, accrued interest can also be defined as interest earned but not yet received. An example of this type of accrued interest would be a bond.
There are a variety of ways to calculate your accrued interest, depending on the type of loan or bond. Calculating your monthly accrued interest can be handy if you are looking to find out how much you may owe on an unpaid credit card bill. To do so, you would divide your annual interest rate by 12. Then you can divide your result by 100 to find out the decimal number rather than the percentage.
Examples of term
One example of accrued interest is the amount of interest an individual may accumulate on their student loans. For instance, new graduates do not have to repay their loans right away. However, the loan will start to accumulate accrued interest as soon as you complete your education.