Top 3 Interest Accrual Methods Explained[+ Decision-Making Flowchart] 

Lenders don’t lose money all at once—it happens in small, unnoticed ways. Interest accrual is one of them. A slight miscalculation in how interest adds up can throw off cash flow, shortchange earnings, or cause disputes with borrowers. Over time, these seemingly ‘small’ differences can accumulate into significant financial losses.

I’ve seen lenders run into problems simply because they picked an accrual method without considering how it affects payments, reporting, and long-term profitability. That’s why I put this guide together. In this article, I’ll break down the three main accrual methods, show how they impact loans, and give you a clear way to pick the right one.

By the end, you’ll know how to avoid common pitfalls and make a decision that keeps both your books and your borrowers in check. Let’s get into it.

What Is Interest Accrual?

Lenders use different interest accrual methods to determine how interest builds up over time. The method chosen affects the total interest a borrower pays over the life of a loan. If you’re managing loans, you need to understand how these methods work and what impact they have on repayment.

The following three factors influence interest accrual:

1. Payment Frequency – How often payments are due. Payments can be made monthly, quarterly, twice a month, weekly, every other week, annually, or even a single lump-sum payment.
   
   
2. Interest Day-Count – How the number of days between two payments is calculated. Some methods assume every month has 30 days (Periodic 30/360), while others count actual days (Actual/365).
   
   
3. Per Diem (Daily Interest) – The daily interest rate used to calculate prorated payments and accrued interest. It’s typically based on a 360, 364, or 365-day year.

So, essentially, you will be working with one of these three methods: 30/360, Actual/360, or Actual/365. Each has its oen implications. So, let’s break them down.

1. Periodic 30/360 (Fixed Day-Count Method)

This method calculates interest based on a fixed 30-day month and a 360-day year, regardless of whether a month has 28, 29, or 31 days. Lenders favor this approach because it keeps interest calculations consistent, making payments predictable for both parties. It is widely used in mortgages and commercial real estate loans, where stable payment structures are essential for long-term financial planning.

What This Means for Lenders

• Predictable revenue – Each month’s interest is the same.
  
  
• Easier calculations – No need to track actual days in the month.
  
  
• Slightly lower lender yield – Because it assumes fewer days in a year than reality (365 or 366).

2. Actual/360 (365/360 – Higher Effective Interest Rate Method)

This method bases interest on the actual number of days in each month while dividing the annual rate by 360. Since months with 31 days generate more interest, the effective rate ends up higher than the stated rate. It’s widely used in commercial lending and corporate finance, where lenders benefit from the increased interest accrual over time.

What This Means for Lenders

• Higher effective yield – Extra days in longer months mean more interest earned.
  
  
• More complex accounting – Since each month’s interest is different, calculations require actual days.
  
  
• Better for lenders than borrowers – Over time, borrowers pay more interest than they would with 30/360.

3. Actual/365 (365/365 – Borrower-Friendly Method)

This method calculates interest using the actual number of days in each month and year, dividing the annual rate by 365 or 366 in leap years. Since it spreads interest evenly across the full year, the effective rate is lower than the Actual/360 method. It’s commonly used in consumer loans, personal lending, and certain commercial loans where a more borrower-friendly structure is preferred.

What This Means for Lenders

• Lower interest income – Since the divisor is larger (365 vs. 360), daily interest is slightly lower.
  
  
• More borrower-friendly – Interest doesn’t get inflated by using 360 days as the denominator.
  
  
• Common in regulated lending – Often used in personal, consumer, and mortgage lending due to fairer calculations.

Your interest accrual method shapes borrower expectations, cash flow, and profitability. Choosing the right one depends on your loan structure, financial goals, and how you want interest to accumulate over time. So, here are three things that you need to consider before choosing one for a loan:

1. Loan Type: Consumer vs. Commercial

The accrual method you choose will largely depend on the type of loan.

• Consumer loans (e.g., mortgages, auto, personal lending) → Often use Actual/365 to align with borrower protections and regulations.
  
  
• Commercial loans (e.g., real estate, business financing) → Typically use Actual/360 or 30/360 for consistency and lender returns.

Therefore, if you are a mortgage lender offering fixed-rate home loans, you should go with Actual/365, keeping interest charges fair. On the other hand, if you are, say, a private lender funding commercial bridge loans, you may actually prefer Actual/360, slightly increasing your yield.

2. Borrower Expectations & Compliance

It is also very important to consider which method aligns with your borrowers’ expectations and regulatory requirements.

• Regulatory requirements → Some loan types (like mortgages) require Actual/365.
  
  
• Corporate borrowers → Often expect Actual/360, even if it results in slightly higher costs.
  
  
• Payment predictability → 30/360 spreads interest evenly across payments.

For example, a real estate syndicator, who is offering long-term investor loans might favor 30/360 for stable payment amounts. However, a short-term lender funding rehab projects might use Actual/360 to capture more interest over time.

3. Cash Flow & Profitability Impact

When choosing an accrual method, it’s important to balance steady cash flow with long-term profitability. And diversifying your loan portfolio with different accrual methods can help achieve this.

• 30/360 → Keeps payments uniform, which can help with cash flow planning.
  
  
• Actual/360 → Increases lender returns slightly since interest accrues over more days.
  
  
• Actual/365 → Lowers the borrower’s total interest paid, making it an attractive option for them.

However, your choice might also depend on your overall goal. A lender focused on maximizing income might lean toward Actual/360, while one competing for high-quality borrowers may highlight Actual/365 as a borrower-friendly feature.

Picking the right interest accrual method might still seem tricky to you. That’s why I’ve put together a flowchart with a step-by-step guide to help you decide which method fits best.

The way interest accrues on a loan affects not just your borrowers but also your cash flow and processes. A mismatch can create reporting issues, unexpected costs, or even disputes with borrowers. On the other hand, selecting the right method keeps payments predictable and aligns with your long-term lending strategy. And that’s just the first step. 

Proper setup and clear borrower communication matter just as much as the method itself. Get it wrong, and even the best choice can turn into a liability.

If you’re handling just a few loans, calculating interest accrual in a spreadsheet might work. However, as your portfolio grows and loans follow different accrual methods, managing them manually becomes overwhelming. Tracking payments, reconciling reports, and avoiding errors can quickly turn into a headache. If keeping up with this process is slowing you down, it might be time to find a better solution. Read our blog Boost Loan Servicing Efficiency with Bryt’s Interest Accrual [+ Setup Checklist], and see how Bryt automates the process for you.

Brian Allen

About Brian Allen

Brian Allen is the Chief Information Officer (CIO) at Bryt Software, where he leads developing next-gen loan management and servicing software solutions. With over 18+ years experience in the industry, Brian is an expert known for his technical excellence. Before joining Bryt Software, Brian co-owned RTEffects, a renowned provider of...