How to calculate arrears on a loan
By Equipo Prestafolio
The exact formula, what grace days are, the base it applies to, and a worked example with real numbers.
Arrears are calculated like this: outstanding instalment × daily arrears rate × days late beyond the grace days. It is a linear sum: every day late adds the same charge, and yesterday's arrears do not generate arrears today. With an instalment of 5,000, a rate of 1% per day and 3 grace days, a client who turns up 10 days late owes 350 in arrears: not 500, and not 350 plus interest on that 350.
The formula, piece by piece
Step | How it is calculated |
|---|---|
Days late | Today's date (or the collection date) − the instalment's due date |
Days in arrears | Days late − grace days |
Arrears | Outstanding instalment × daily rate × days in arrears |
Total to collect | Outstanding instalment + arrears |
And the three rules that define its behaviour:
- It is linear, not compound. Every day adds the same charge on the same base. Accumulated arrears are not capitalised.
- Grace is a strict threshold. There are arrears only if the days late exceed the grace period. With 3 grace days and 3 days late, arrears are zero. On the fourth day the clock starts, and you charge for 1 day, not 4.
- If the rate is zero, there are no arrears. It sounds obvious, but it is the number one cause of "the system is not charging arrears": the rate was never configured.
Days are counted whole
Midnight to midnight, not by the hour. A payment at 11 p.m. on the due date is not late. And a payment at 8 a.m. the next morning is one day late, even though only nine hours have passed.
Counting by the hour feels fairer and is an endless source of arguments with the client. Whole days: the due date, the collection date, and the subtraction.
The base it applies to
Here is the most expensive mistake, and it is conceptual: arrears are calculated on the overdue instalment, not on the loan's total balance.
A client owes 60,000 in total and has one overdue instalment of 5,000. Arrears are calculated on 5,000. Applying them to the 60,000 multiplies the charge twelvefold and, in many jurisdictions, walks straight over the line of what the law allows you to charge.
And there is a nuance almost everyone misses: if the client made a partial payment against that instalment, the base drops. An instalment of 5,000 with a 2,000 part-payment → arrears run on 3,000, not on 5,000. The base is always what is still outstanding on that instalment, not what it was originally worth.
A worked example
A loan with a 1% daily arrears rate and 3 grace days. Outstanding instalment: 5,000. The client turns up 10 days after the due date.
Step | Calculation | Result |
|---|---|---|
| From the 1st to the 11th | 10 days |
| 10 − 3 grace | 7 days |
| 5,000 × 1% | 50 per day |
| 50 × 7 | 350 |
| 5,000 + 350 | 5,350 |
How the same case evolves day by day:
Days late | Days in arrears | Arrears | Total to collect |
|---|---|---|---|
2 | 0 | 0 | 5,000 |
3 | 0 | 0 | 5,000 |
4 | 1 | 50 | 5,050 |
7 | 4 | 200 | 5,200 |
10 | 7 | 350 | 5,350 |
30 | 27 | 1,350 | 6,350 |
Look at the jump from day 3 to day 4: from 0 to 50. That is not a rounding error, that is what a strict threshold means.
If you were given a monthly rate
Many lenders talk about "3% monthly arrears". To use the formula you need the daily rate:
Rate you were given | Equivalent daily rate |
|---|---|
3% monthly | 3 ÷ 30 = 0.1% per day |
5% monthly | 5 ÷ 30 = 0.167% per day |
1% daily | already daily: 1% |
Divide by 30, not by the actual days in the month: if you divide by 28 in February and by 31 in March, the same loan ends up with two different rates and you will not be able to explain it to anyone.
The three mistakes that cost the most money
Mistake | Consequence |
|---|---|
Applying arrears to the total balance | Disproportionate charge and legal exposure |
Charging as if grace did not exist | An argument with the client at every collection |
Not freezing arrears on collection | A month later you do not know what you charged |
The third one deserves a paragraph. Arrears change every day: they are a live figure for as long as the instalment is overdue. The moment the client pays, you must record how much arrears were actually charged that day. If you do not store it (and a spreadsheet using TODAY() does not store it, it recalculates it), the history rewrites itself every time you open the file, and you permanently lose the answer to "did I charge this client the arrears or did I waive them?".
Before you set your arrears rate: check the law
Default interest is regulated in practically every country in the region, and the caps vary enormously between jurisdictions. In some it is limited as a multiple of the ordinary interest rate; in others there is a nominal cap; in several, charging above the maximum makes the clause void (or exposes the lender to a penalty) even if the client signed.
Do not take a figure from a blog (not from this one either). Check your country's rules: your jurisdiction's central bank or banking superintendency publishes the current limits and how they are calculated. It is half an hour of reading that saves you a serious problem.
Summary
- Arrears = outstanding instalment × daily rate × (days late − grace days).
- Days are counted whole; grace is a strict threshold.
- The base is the overdue instalment, net of part-payments, never the total balance.
- On collection, freeze the arrears charged. If you do not store it, it never happened.
- The legal caps are set by your regulator, not by your judgement.
In Prestafolio arrears are calculated automatically, every day, using each loan's rate and grace days, and they are frozen at the payment with a full audit trail. The exact implementation is documented in How arrears are calculated and Configuring the arrears rate.