Past Due Balance Method
What Is the Past Due Balance Method?
The past due balance method is an approach to working out interest on a loan. Under the past due balance method, the borrower is given a grace period prior to which they won't be charged interest on the outstanding balance of the loan.
This approach, which is profitable to the borrower, is usually employed by credit card companies.
How the Past Due Balance Method Works
Under the past due balance method, borrowers partake in a sans interest period on new borrowings. However long they repay the outstanding balance as of the finish of that period, they won't cause any interest. With regards to credit cards, the grace period is normally somewhere in the range of 20 and 30 days, and is set to overlap with the card's billing cycle. Customarily, the payments are due toward the finish of every month, albeit the specific can contrast contingent upon the card provider and the date at which the card was issued.
According to the point of view of the lender, the past due balance method expands their exposure to prepayment risk. All things considered, on the off chance that a large number of borrowers pay off their obligations inside the recommended grace period, then the lender will have really given them a sans interest loan. Since the lender must cover their own operational and financial costs — including the cost of inflation — they will definitely lose money on such sans interest loans, when seen on a net basis.
For borrowers, nonetheless, the past due balance method can be profoundly appealing. Assuming the borrower is steady in paying off most or each of their obligations inside the grace period, then they can work on their cashflow by getting low-cost or zero-cost credit from the loan provider. Simultaneously, such propensities can likewise assist with further developing the borrower's credit score, while at the same time qualifying them for fringe benefits, for example, participating in the lender's money back or rewards programs. Consequently, lenders who utilize the past due balance method are depending on the assumption that a huge percentage of their customers will fail to pay off their loans on time, and will hence start to accrue interest or different punishments.
Real World Example of the Past Due Balance Method
Mia is assessing the cardholder agreement for her new credit card. She notes that the card utilizes the past due balance method, giving a 28-day grace period. On the 28th of every month, all outstanding balances start to bring about interest charges, implying that she can try not to pay any interest as long as she pays off her full balance before this date. Simultaneously, any unpaid balances left past that grace period will start to cause interest charges. For instance, on the off chance that Mia brings about $500 of expenses and pays off $400 as of the finish of day 28, then interest would start accumulating on the $100 unpaid balance.
Subsequent to checking on these terms and different provisions of the cardholder agreement, Mia chooses to continue with the card. All things considered, she is now prone to pay off her full card balance toward the finish of each billing cycle. Subsequently, she isn't worried about the risk of causing interest past the 28-day grace period. Simultaneously, she will actually want to benefit from the card's money back and reward programs, implying that she can successfully profit from her utilization of the card.
Features
- It is ordinarily utilized with credit card companies, and is thought of as beneficial for the borrower.
- The past due balance method is a system for working out interest.
- Under the past due balance method, borrowers who pay off their full balance inside the recommended grace period can really profit from their utilization of the loan.
