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What is Interest Due?
Interest due refers to the amount of accrued interest that must be paid at a given time. Interest is distinct from principal and is assessed on loans. Interest can accrue on a daily, weekly, monthly or quarterly basis and can come due at different intervals depending on the terms of the loan.
When a person borrows money, the amount of money he borrows is referred to as the principal. The individual that is borrowing the money is charged interest, or a fee, for the privilege of doing so. The interest is normally represented as percentage.
The percentage, called the interest rate, varies depending on the type of the loan. Interest rates tend to be lower for secured loans, such as mortgages, in which rates can be around 5 percent. On the other hand, rates are often higher for unsecured loans, such as credit cards, in which rates can reach upwards of 20 percent annually.
The terms of the loan document will also spell out how interest is calculated. The interest is then determined by multiplying the principal balance times the interest. If, for example, 5 percent annual interest is charged on a loan but interest accrues monthly, that means that each month .004 percent (5 percent divided by 12) times the balance is charged.
Interest thus accrues throughout the course of the loan and this interest that you accrue becomes part of the balance of interest due. When a person has interest due, that interest must be paid at certain points depending on the nature of the loan. For fixed rate mortgages, the interest over the life of the loan is calculated and added to the principal and this is used to determine how much a homeowner must pay each month to pay off the mortgage in full by the end of the term of the loan.
In other types of loans, interest due is simply added to the principal and monthly payments are determined on the basis of the total amount due. In these cases, payments that a person makes are generally applied first to pay the interest due and then to reduce the principal. If the payments a person makes are not enough to pay the interest, the unpaid interest gets tacked on to the principal and raises the balance due. In these situations, even though a person is making payments on a monthly basis, his loan balance will generally continue to go up instead of going down.
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Discussion Comments
@nony - Actually I am a little contrarian in this regard. I realize that prepayment of your mortgage is kind of conventional wisdom, but it doesn’t always work in your favor.
For example, if you pay down the principal and reduce your interest, then you will lose the tax benefits of the mortgage interest deduction. That may or may not be important to you. It’s certainly important to me.
The mortgage interest deduction and my charitable giving put me over the standard deduction and ensure that I get a refund every year. I kind of look forward to that check.
Of course without the refund you are getting money in the form of interest savings, which is kind of future cash because you can’t tap into it while you’re still living in the house. It’s really about pay me now or pay me later. It’s up to you.
@David09 - I agree. Mortgage debt is pretty much fixed unless you get an adjustable rate mortgage, in which case your interest factors can change on an annual basis.
In a worst case scenario under such a loan you would be faced with really high interest and can no longer afford the mortgage payment. I’ve always been told that you should prepay your mortgage, by making an extra payment each month or paying biweekly or any of a number of other methods.
Prepayments will be applied towards the principal and you can save hundreds of thousands of dollars in interest payments in the process.
Not all interest is created equal. Credit card interest due is the worst of all evils. It’s at a very high percentage rate and it’s not fixed, despite what you might think at first.
Credit card companies have been known to throw you a low introductory rate and then switch it to a high rate a year later, and even that can change to an even higher rate.
This variability makes it difficult to calculate interest due in a way that you can meaningfully account for in a budget. That’s why all the financial gurus out there say that you should attack credit card debt first. It takes a bigger chunk out of your wallet than just about any other kind of interest out there.
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