Accrued interest: What it is and how to calculate it

Accrued interest can mean two different things. On one hand, it can boost investment income or savings. But if you’ve borrowed money, accrued interest can increase the amount you owe.

Learn more about how interest accrues and how to calculate it.

What you’ll learn:

• Accrued interest is unpaid interest related to credit cards, loans, investments, savings and beyond.

• Accrued interest on a loan or credit card adds to how much a borrower owes.

• Accrued interest on a savings account or an investment earns income.

• You could use a formula to calculate accrued interest on your own or find a reliable online calculator to help.

Accrued interest refers to the interest that builds over time. When a person borrows money, accrued interest could increase what they owe. That’s usually the case with credit cards, mortgages and student loans. But when it comes to things like investments and savings accounts, accrued interest means money is being earned.

The difference between regular interest and accrued interest is mostly a matter of timing. Once accrued interest becomes available, that’s when it might be referred to as regular interest or paid interest.

Accrued interest is based on a lot of factors, including the principal amount of the debt or investment, the interest rate, timing and more. 

It might help to break down a couple of examples to show how interest accrues.

For loans, interest is the cost of borrowing money. As interest accrues, it’s typically added to whatever amount is borrowed and any other charges. Interest on a loan may accrue daily and then be applied to the balance you owe on a monthly basis.

For credit cards, interest is typically the same as the annual percentage rate. Credit card interest can accrue differently depending on the type of transaction. One way to reduce the amount of interest you’re charged is by paying off your balance on time every month.

For savings or investment accounts, interest that accrues is typically being earned. As with borrowing, interest accrues based on the rate and how much money is saved or invested.

Bonds are one example of an investment. When someone purchases a bond, they’re basically loaning money to the government or company they purchased it from. As the bond matures, interest accrues based on the initial investment.

One of the easiest ways to calculate the interest is to use an accrued interest calculator. But doing some quick math yourself might help you get an idea.

While there are other factors to consider, here’s a general formula to calculate the annual interest for a loan: 

Principal loan amount x Annual interest rate x (Number of days accrued / Number of days in the year) = Accrued interest

For example, let’s say you have a car loan for $20,000 with an interest rate of 5%. The interest accrual would be about $2.73 each day. So when your bill comes due after a 30-day period, about $82.19 of interest would accrue.

Here’s what that looks like plugged into the formula: 

20,000 x 0.05 x (30 / 365) = 82.19

When it comes to accruing interest, you’re either earning it or paying it. Although learning about how interest works may seem complicated, understanding why and how it’s calculated can help you learn more about managing money.