Accrued Interest – Definition, Example & How to Calculate it?

Posted on Thursday, November 14th, 2024 | By IndusInd Bank

When was the last time you checked your bank statement? Did the interest credited seem lower than expected? You might not be accounting for accrued interest. It is key to calculating interest earnings and payments. If you deal with loans, bonds, or savings accounts, knowing what accrued interest is, is crucial. 

What Is Accrued Interest?

If you often wonder ‘what is accrued interest?’, Accrued interest is the interest that accumulates on a loan, bond, or deposit. This interest builds up over time, and the total amount owed or earned is typically settled at a later date.

For example, with a savings account, interest accrues daily. But it is usually credited to your account monthly or quarterly. Similarly, if you borrow money, the interest accrues daily. It adds to your total repayment amount.

Understanding the accrued interest meaning is essential for both, borrowers and investors. It helps borrowers know exactly what they owe, and it allows investors to track how much they should earn.

How to Calculate Accrued Interest?

Calculating accrued interest requires a simple formula. But you should have a clear understanding of the terms involved.

Accrued Interest = (Principal X Rate X Time)/360 or 365

• Principal: The amount of money on which the interest is calculated.
• Rate: The annual interest rate.
• Time: The number of days for which the interest is being calculated.
• 365 or 360: It depends on the convention used. Most savings accounts use 365 days. Some financial instruments use 360 days.

Suppose you have a bond with a principal of ₹1,00,000 and a 5% annual interest rate. To know the accrued interest of the bond for 30 days, you will have to carry out the following calculation:

Accrued Interest = (1,00,000 X 0.05 X 30)/365 = 1,50,000/365 ≈ ₹410.96

This ₹410.96 is the interest for 30 days. It will be added to your total earnings at the end of the interest period.

Interest Paid vs Interest Accrual: Know the Difference

Some people might have confusion between interest paid vs. interest accrual. The actual amount of interest credited to your account or paid out on a loan is the interest paid. In contrast, interest accrual is the unpaid, accumulated interest.

For example, in a savings account, you might see interest paid quarterly. However, interest accrues daily. So, the amount you see at the end of the quarter is the total of all the daily accruals. On a loan, the interest accrues daily, but you might only make monthly payments.

This difference is key. It helps you understand your financial statements. It ensures you are not overpaying or under-earning.

On the other hand, savings account accrue interest as well. The major difference between them & loans in this regard is that you receive interest accrued on a savings account. Meanwhile, interest accrued on a loan must be paid by you. Additionally, with a zero-balance savings account, you can utilise all the interest that is accrued in your account.

Indus Delite Zero Balance Savings Account: Simplifying Your Banking Experience

For a hassle-free banking experience, try the Indus Delite Zero Balance Savings Account from IndusInd Bank. It is an excellent solution. A key benefit of this account is that you earn interest on your savings. You do not have to maintain a minimum balance. This account maximizes your savings.

With this account, you get:

• Zero Balance Requirement: No need to worry about maintaining a minimum balance.
• Competitive Interest Rates: Earn competitive interest rates up to 6.75% p.a. on your savings. These interest rates are subject to change, check out updated savings account interest rates.
• Easy Access: Bank anytime, anywhere with robust online and mobile banking services.

This product is ideal for those who want a savings account’s benefits without the usual limits. Also, knowing how interest accrues on your savings can help you earn more. The Indus Delite Zero Balance Savings Account makes managing your money easy.

Also Read: How Interest Works on Savings Accounts

Conclusion

Understanding accrued interest is crucial for anyone looking to make informed financial decisions. Understanding how interest accrues can help you manage your money. You can invest, save, or borrow in a smart way.

If you want to open a bank account that matches your goals, try an Indus Delite Zero Balance Savings Account. It is designed to offer flexibility and convenience while helping you grow your savings. Do not miss out on the opportunity to make your money work harder for you.

Make the smart choice for your savings—Open an Indus Delite Zero Balance Savings Account today!

Disclaimer:
The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.