Accrued Interest

How Accrued Interest Works

Interest accrues over time, based on the principal amount and the agreed interest rate. Whether you are repaying a loan or earning from an investment, the interest continues to build until it is paid or credited.

Example

Suppose you borrow ₹10,000 at an annual interest rate of 5 percent. If 30 days have passed since your last payment, the accrued interest can be calculated as:

Accrued Interest = ₹10,000 × 0.05 × (30 ÷ 365) = ₹41.10

This means that ₹41.10 in interest has accumulated over 30 days, even though it has not yet been paid.

Key Components

• Principal Amount: The original amount borrowed or invested

• Interest Rate: The annual rate at which interest is calculated

• Accrual Period: The time between the last interest payment and the current date

Benefits of Accrued Interest

• Better Financial Planning: Helps borrowers understand how much interest they owe, making it easier to plan payments

• Tracking Investment Returns: Investors can track interest earned on fixed-income instruments like bonds or deposits

• Tax Planning: For certain types of loans, such as education or home loans, accrued interest may be tax-deductible

Challenges to Consider

• Increased Loan Burden: If not paid regularly, accrued interest can significantly raise the total cost of borrowing

• Complexity for Investors: Calculating returns may require considering accrued interest, especially when selling or redeeming investments before maturity

• Cash Flow Management: Borrowers must ensure they account for interest that has built up even if it is not yet due

Conclusion

Accrued interest may seem small on a daily basis, but over time it plays a big role in determining how much you earn or owe. In personal finance, understanding how it works helps you stay on top of your repayments and get a clearer view of your investments. Whether you are a borrower or an investor, tracking accrued interest is key to making informed financial decisions.