Interest accrual: day counts and payment dates

Interest accrual and payment scheduling answer different questions. Accrual determines how much interest accumulates over a defined period. Payment scheduling determines when funds must arrive. A business-day adjustment to the payment date does not necessarily add or remove accrual days, and an annual coupon divided by twelve may not reproduce an actual-day invoice.

Before comparing loan costs, write down the principal balance, annual rate, day-count basis, start and end dates, inclusion rule, rounding rule and payment due date. If any of these changes within the period, split the calculation at the change. A spreadsheet with one “monthly interest” formula can conceal differences that matter at closing, payoff or a rate reset.

Use the convention named in the agreement

The New York Fed’s methodology uses actual calendar days and a 360-day year for its SOFR averages and index. That description does not impose a convention on every commercial loan. The loan’s own provisions remain the source for its accrual calculation.

The June 1, 2022 Block 40 agreement, Sections 2.2.3 and 2.3.2, illustrates separate rules for accrual and payment timing. Its specific rules should not be imported into another transaction.

For simple interest at a fixed balance, actual/360 means principal × annual rate × actual days ÷ 360. Actual/365 fixed uses 365 in the denominator, including in a leap year. Other actual/actual conventions are different again. For 30/360, identify the precise variant and its end-of-month rules; “thirty days” is insufficient documentation for every stub period.

Worked exhibit: the same rate, different months

Assume $3 million outstanding at a constant 6% annual rate. Use simple interest, no principal payments and intervals that include the start date and exclude the end date. Dates below are calendar dates, not business-day-adjusted payment dates. Round only each final interest amount to cents.

For a full non-leap 365-day year, actual/360 interest is $182,500. Actual/365 fixed interest is $180,000. Dividing $182,500 by the principal gives a 6.0833% simple cash-interest proportion for that year. It is not an effective annual yield with compounding and it excludes fees.

A modeled 30/360 schedule with twelve complete 30-day interest periods gives $15,000 each period and $180,000 for the year. The rate label remains 6% in every case. The calendar and denominator explain the difference; no rate increase is necessary.

Balance changes require their own intervals

Assume a separate 30-day actual/360 period at 6%. Principal is $3 million for the first ten days and $2.5 million for the next twenty days after an effective paydown. Interest is $3 million × 6% × 10/360 plus $2.5 million × 6% × 20/360, or $13,333.33.

Using the opening balance for all thirty days would produce $15,000; using the ending balance would produce $12,500. Neither reproduces the assumed daily balance history. Confirm the paydown’s effective date and whether the documents require interest through a later date, a minimum period or another payoff adjustment before treating the daily-balance result as the amount owed.

Apply the same method to advances. A construction draw can raise principal partway through a month. If interest is financed by a reserve advance, determine when that advance enters the balance. Do not assume month-end posting when the actual records show another date.

Keep the due-date rule beside the accrual rule

Consider a hypothetical invoice covering April 1 through April 30, 2027, with a nominal payment date of May 1. May 1 is a Saturday. If the agreement requires payment on the preceding business day, the payment may be due April 30 while still covering the full specified thirty-day period. If another agreement uses a following-business-day rule, the due date may move differently. Neither example authorizes changing the accrual period without reading its clause.

A payment cutoff and time zone can also matter. Record the receiving institution’s requirement and confirm cleared receipt, especially for payoff wires. Do not use a holiday assumption from a generic calendar when the agreement defines business days by named banking centers or systems.

Reconcile a statement without masking the difference

Start with a line-by-line calculation from the documented balance events and rates. Compare it with billed interest before adding escrows, fees or principal. Then reconcile rounding: daily rounded interest and one final rounded period amount can differ by cents, particularly across many days.

Keep the discrepancy visible until its cause is identified. A useful audit note states the exact dates, count, rate, balance and rounding treatment, followed by the lender’s response. For a payoff, obtain a current statement with a good-through date and per-diem instructions rather than extending an old invoice mechanically. Accurate arithmetic supports the discussion; the contract and current account status determine the payment obligation.