Please ensure Javascript is enabled for purposes of website accessibility

How to Calculate Accrued Interest Payable

By Motley Fool Staff – Updated Nov 27, 2016 at 6:53PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Calculating the interest accrued can give you an idea of your next interest charge, as well as how much of your payment will go toward the principal.

When you take out a loan, or carry a balance on a credit card, the interest accrues constantly. However, if you make regular payments, this interest isn't compounded. For this reason, calculating the unpaid interest that has accrued on a loan is pretty straightforward to do.

Calculating accrued interest payable
First, take your interest rate and convert it into a decimal. For example, 7% would become 0.07. Next, figure out your daily interest rate (also known as the periodic rate) by dividing this by 365 days in a year.

Next, multiply this rate by the number of days for which you want to calculate the accrued interest. Finally, multiply by the account balance in order to determine the accrued interest.

It's also worth noting that not all accounts use 365 days to determine the daily interest rate. For example, many bonds use 360 days in a year. So, for the most precise calculation possible, confirm with your creditor or lender before calculating. For loan products like credit cards, you should be able to find this information in your cardholder agreement or any document with your loan's terms.

An example
Let's say you carry a $3,000 credit card balance at an APR of 16%, and that you want to know how much interest you can expect to pay on your March bill. First, you can determine the daily interest rate by dividing 0.16 by 365 days in a year.

Since March has 31 days, we can use the accrued interest formula to calculate your interest payable for the month.

Average daily balance
This is a simplified example, as it assumes your credit card balance stays the same throughout the billing period. In practice, however, credit card balances change as you make purchases, which complicates the calculation.

To calculate accrued interest for a changing balance, you can use the above formulas along with your average daily balance, which can be found using the following method.

For example, let's say that in a 30-day month, you carried a balance of $1,000 for 10 days and then made some purchases which brought your balance to $2,000 for the other 20 days. In this case, you can compute your average daily balance as:

So, when calculating the accrued interest for a certain time period, be sure to use the average daily balance for an accurate calculation.

And if you're an investor, you know all about doing calculations. Need help? Just getting started? We can help. Just head on over to our Broker Center.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at [email protected]. Thanks -- and Fool on!

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.