Over the 10 year term of the loan, the borrower would pay a total of $537,354 in interest in addition to the $2,500,000 in principal repaid. Using the 30/360 accrual method, $8,333,33 of the month one payment is applied to interest and the remaining $16,977.95 is applied to principal. Calculate the Monthly Accrued Interest: Multiply the monthly accrual rate by the outstanding balance to get the monthly interest accrual amount: $2,500,000 *.Calculate the Monthly Accrual Rate: Multiply the daily accrual rate by 30 to get the monthly accrual rate.Calculate the Daily Accrual Rate: Identify the annual interest rate, 4.00%, and divide it by 360 to get the daily accrual rate.Method 1: 30/360Ĭalculating accrued interest using the 30/360 method is a straightforward process using the following steps: Let’s look at each method individually before comparing them side by side. In order to best demonstrate the differences between accrual methods, a loan example is needed: Here’s the scenario:Īlthough the loan payment is the same, the portion that goes to principal and the portion that goes to interest will vary with each of the 3 accrual methods. With this knowledge, hopefully you’ll be able to save a few dollars in interest the next time you obtain a loan. As such, it’s important to be aware of these accrual methods, their differences, and how each one is calculated. When we got to this point, the Loan Operations manager would always turn to me and say, “what’s the difference between 30/360, Actual/360, and Actual/365, and which one should we go with?”Īlthough minor, the differences between loan accrual methods can result in multi-thousand dollar variations in interest paid over the term of a loan. In every installation, there came a point where the bank would have to decide which accrual method to use for its loan portfolio. In a former life, I helped banks install loan servicing software.
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