Per Diem Interest
What Is A Per Diem Interest?
The term “per diem interest” refers to interest charged on loans (most often mortgages) daily, instead of monthly or annual.
Per diem interest allows lenders to be flexible in the loan disbursement and offers borrowers a convenient loan repayment method. It is an interest calculated between the closing date of a loan and when regular loan repayment begins. For instance, if the loan terms require repayments on the first day of the month, the per diem interest is calculated by the number of days left till the first day of the following month.
After taking a mortgage, you pay interest on it at the beginning of every month. This is in addition to payments you make against the principal. Since you may receive the loan on any day other than the 1st day of the month, the lender will charge you daily interest for the days between when you received the mortgage and the beginning of the next month when actual payments begin. Afterward, the loan repayment will revert to monthly payments.
Each lender has different terms on how they structure per diem interest when disbursing loans. If you are a borrower, you must check how a lender structures theirs before taking a loan. Some lenders may change the repayment date from the beginning of the month to the day you received the loan. If you received the loan on the 19th, you will be making repayments on the 19th of every month.
Per Diem Interest Example
Wilson closes a loan on the 24th of November. The loan, $200,000, has a fixed interest rate of 4% for a year and requires that he begins payments on the first day of the month after a whole month’s repayment cycle. However, because Wilson received the loan on the 24th, seven days before the first day of the following month, the lender calculates per diem interest by dividing the expected interest ($8000 – 4% of $200,000) by 365 (the loan term is a year). The lender arrives at $21.91 as per diem interest. Wilson will pay $153.37 ($21.91 x 7) because of the seven days left until the beginning of the month.« Back to Glossary Index