What Is Arrears?

Arrears is a financial and legal term that refers to the status of payments in relation to their due dates. The word is most commonly used ꦅto describe an obligation or liability that has not received payment by its d⛦ue date. Therefore, the term arrears applies to an overdue payment.

If one or more payments have been missed where regular payments are contractually required, such as mortgage or rent payments and utility or telephone bills, the account is in arrears. Payments that are made at the end of a period are also said to be in arrears. In this🏅 case, payment is expected to be made after a service is provided or completed—not before.

Understanding Arrears

🧸 Arrears, or arrearage in certain cases, can be used to describe payments in many different parts of the legal and financial industries, including the banking and credit industries, and the investment world. The term cಌan have many different applications depending on the industry and context in which it is used.

As noted above, arrears generally refers to any amount that is overdue after the payment due date for accounts such as loans and 澳洲幸运5官方开奖结果体彩网:mortgages. Simply put, it means your payment is late. Accounts can also be in arrears for things like car payments, utilities, and child support—any time you have a payment due that you miss.

Being in arrears may or may not have a negative connotation depending on how the term is used. In some cases, such as bonds, arrears can refer to payments that are made at the end of a certain period. Similarly, mortgage interest is paid in arrears, meaning each monthly payment covers the 澳洲幸运5官方开奖结果体彩网:principal and interest for the preceding month.

Example of Arrears

For example, if your $500 loan payment is due on Jan. 15 and you miss the payment, you are in arrears for $500 as of the ne♔xt business day.

If you continue ✱making regular payments each month after that, you are still in arrears for $500 until the time you m💜ake up the payment you missed. Similarly, if you paid $300 of that Jan. 15 payment, you are in arrears for $200 as of Jan. 16 until the time you pay it off and bring your account up to date.

Payment in Advance vs. Payment in Arrears

When two parties come to an agreement in a contract, payment is usually made before or after a product or service is provided. Payment made before a service is provided is common with rents, leases, prepaid phone bills, insurance premium payments, and Internet service bills. These types of payments are referred to as payment in advance. When the bill becomes overdue—say 30 days past the due date for payment—the account falls into arrears and the account holder may get a late notice ♒and/or penalty.꧂

There are also instances where bills or liabilities come due after the service has been provided such as utility bills, property taxes, and employee salaries. These payments are known as payment in arrears, occur at the end of the period, and are not classified as late. They do, however, fall into arrears if you don't pay them by the due date.

Arrears can also apply to payroll accounting. When payrolls are in arrears, the previous week’s (or some other period's) payments are processed and paid out to employees as opposed to wages earned during the current period. Current pay would instead occur as payroll and processed each period as it ends.

Types of Arrears in Finance

Annuity in Arrears

Arrears can also be applied to instances in the context of finance. One example is for 澳洲幸运5官方开奖结果体彩网:annuity payments. An annuity such as a loan repayment is a series of equal amounts of payment that occurs at equal time intervals—say for $250 per month for 10 years. If the annuities are due at the end of the period such as mortgage payments, they are called an 澳洲幸运5官方开奖结果体彩网:ordinary annuity or 澳洲幸运5官方开奖结果体彩网:annuity in arrears.

Dividend in Arrears

Arrearage also applies to dividends that are due but have not been paid to 澳洲幸运5官方开奖结果体彩网:preferred shareholders. Because preferred shares have guaranteed dividends regardless of whether the company makes a profit or not, dividends are said to be in arrears if the company misses a cumulative dividend payment. The 澳洲幸运5官方开奖结果体彩网:dividends in arrears must be disclosed in the footnotes to the financial statement. The company is also restricted from making any 澳洲幸运5官方开奖结果体彩网:dividend payouts to 澳洲幸运5官方开奖结果体彩网:common shareholders until it settles its dividends payable account.

Interest in Arrears (Bonds)

Some loans have interest in arrears. This means that the interest is due to be paid on the maturity date of the loan, instead of in bits and pieces during the life of the loan like an annuity payment. Interest payments on bonds are usually paid in arrears. When an issuer makes $50 澳洲幸运5官方开奖结果体彩网:coupon payments semi-annually, this means the interest on the bond would have to accrue for six months before any payment is made to the 澳洲幸运5官方开奖结果体彩网:bondholders.

Arrears Swap

An arrears swap is an 澳洲幸运5官方开奖结果体彩网:interest rate swap that is similar to a regular, or 澳洲幸运5官方开奖结果体彩网:plain vanilla swap, but the floating payment is based on the interest rate at the end of the reset periodಞ, instead of the beginning, and is then applied retroactively.