What Is Per Diem Interest and How Is It Calculated?

Per diem interest is the amount of interest that accrues on a loan for a single day. This daily calculation is particularly relevant in financial transactions, as interest charges accrue daily rather than solely monthly or annually. Understanding daily interest helps borrowers, as it directly impacts the total amount owed and payment timing.

Understanding Per Diem Interest

The term “per diem” is Latin for “per day.” This daily calculation allows for precise interest accrual, ensuring borrowers pay interest only for the exact period they have used the funds.

Calculating per diem interest involves a straightforward formula that applies the annual interest rate to the loan’s outstanding principal balance. The calculation divides the annual interest rate by 365 to determine the daily interest rate. This daily rate is then multiplied by the current loan principal to arrive at the daily interest amount. While 365 days is common for consumer loans, some financial products might use a 360-day year convention for interest calculations.

For example, if you have a loan with an outstanding principal balance of $200,000 and an annual interest rate of 6%, the daily interest calculation would be as follows: (0.06 / 365) $200,000. This results in a daily interest charge of approximately $32.88, which accrues each day the $200,000 balance remains unpaid.

Common Scenarios for Per Diem Interest

Per diem interest frequently appears in mortgage transactions, especially when a home purchase closes in the middle of a month. Lenders charge per diem interest from the closing date up to the last day of that month, ensuring the borrower pays interest for the exact number of days they possess the property before the first full monthly mortgage payment is due.

The purpose of this upfront interest payment is to align the first full mortgage payment with a standard monthly cycle. For instance, if a loan closes on August 15th, the borrower pays per diem interest for the remaining 16 days of August at closing. This allows the first regular mortgage payment, due October 1st, to cover the interest for the entire month of September. This structure helps standardize future payment schedules for both the borrower and the lender.

While mortgages are a prominent example, per diem interest can also apply to other types of loans. Personal loans, auto loans, and lines of credit may also accrue interest on a daily basis from the day funds are disbursed. This daily accrual mechanism ensures that interest is precisely accounted for, whether it’s at the beginning of the loan term or when additional payments are made.

Impact on Your Finances

Per diem interest directly affects the total funds needed at loan closing. For mortgages, this daily interest amount is typically included as part of the closing costs, alongside other fees such as origination fees, appraisal costs, and title insurance. This one-time charge ensures that interest for the partial month is covered upfront, preventing a larger or earlier first payment.

The payment of per diem interest at closing influences when your first full loan payment will be due. Because the initial partial month’s interest is paid at closing, your first regular monthly payment typically covers the interest for the following full calendar month. This means your first standard payment might be due more than 30 days after your closing date, providing a brief period before regular payments begin.

Per diem interest also benefits borrowers who make extra payments or pay off their loans early. When an additional principal payment is made or the entire loan balance is paid off, interest is only calculated up to the exact day the payment is received and processed. This daily precision prevents borrowers from paying interest for days beyond when their principal balance was reduced or fully satisfied. Transparency regarding per diem interest is often detailed in loan estimates and closing disclosures, documents that outline all costs associated with a loan.