Interim interest: Overview, definition, and example
What is interim interest?
Interim interest refers to the interest accrued on a loan or debt obligation during a temporary period, typically between the date funds are disbursed and the start of regular repayment or the next scheduled payment date. This interest is usually calculated on a daily basis and may be paid upfront, added to the loan balance, or included in the first payment.
For example, if a borrower receives loan funds on January 15th and the first payment is due on February 1st, the interest accrued from January 15th to January 31st would be considered interim interest.
Why is interim interest important?
Interim interest is important because it ensures that lenders are compensated for the use of funds during the period before regular payments begin. It helps maintain fairness in financial agreements by accounting for the time value of money.
For borrowers, understanding interim interest is crucial to avoid surprises in initial payment amounts and to plan their finances effectively. For lenders, interim interest provides a mechanism to calculate and collect earnings during partial periods, ensuring profitability and consistency.
Understanding interim interest through an example
Imagine a borrower takes out a $100,000 loan with a 5% annual interest rate. The loan funds are disbursed on March 20th, and the first monthly payment is scheduled for April 1st. Interim interest would accrue from March 20th to March 31st (11 days). The daily interest is calculated as:
- Daily Interest = (Loan Amount × Annual Interest Rate) ÷ 365
- Daily Interest = ($100,000 × 5%) ÷ 365 = $13.70 per day
The total interim interest for 11 days would be $13.70 × 11 = $150.70, which might be added to the first payment or billed separately.
In another example, a mortgage borrower closes on a property on July 15th, with the first payment due on August 1st. The interim interest for July 15th through July 31st would be collected at the time of closing to cover the interest accrued before the first payment period begins.
An example of an interim interest clause
Here’s how an interim interest clause might appear in a loan agreement:
“The Borrower agrees to pay interim interest for the period beginning on the Disbursement Date and ending on the day prior to the first scheduled payment date. Interim interest shall be calculated on a daily basis at the applicable interest rate and shall be due and payable on or before the first payment date.”
Conclusion
Interim interest ensures that lenders are compensated for the time between the disbursement of funds and the start of regular repayments. For borrowers, understanding interim interest is key to avoiding unexpected costs during the initial stages of a loan. By clearly defining and calculating interim interest in loan agreements, both parties can maintain transparency and plan financial obligations effectively.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.