Daily or monthly interest — does it matter?

How interest accrual frequency works

Most business loans accrue interest either daily or monthly. Daily accrual means interest is calculated on the outstanding balance each calendar day and accumulates over the month before being charged or collected. Monthly accrual calculates interest once per month on the balance at a defined point — typically the start of the period or an average balance.

On a standard term loan with fixed monthly repayments, the difference in total cost between daily and monthly accrual on the same annual rate is small — often a matter of tens of pounds on a typical facility. The nominal rate remains the same; the accrual mechanic is a secondary factor.

Where it matters more: revolving credit

On a revolving credit facility or an overdraft equivalent, where the balance fluctuates day to day as drawdowns are made and repayments received, daily accrual is more significant. Interest is charged precisely on the balance each day, so a large repayment mid-month immediately reduces the interest cost for the remainder of that month. Under monthly accrual, the timing of a mid-month repayment may not reduce that month's interest charge at all.

For businesses that actively manage their revolving facility balance — making drawdowns and repayments frequently — daily accrual is generally preferable because it rewards prompt repayment more accurately.

Day-count conventions

Lenders use different day-count conventions: some calculate daily interest as the annual rate divided by 365; others use 360. A 360-day convention produces a slightly higher effective rate than a 365-day convention at the same nominal annual rate. This difference is small but worth noting when comparing two products at the same quoted rate — the day-count convention affects the true daily charge.

The convention is typically stated in the loan agreement. If it is not stated clearly, ask before signing.

Implications for early repayment

On a daily-accrual product, interest stops accruing on the repaid portion immediately. If you make an overpayment or repay early, you pay only for the days the balance was outstanding. On a monthly-accrual product, the timing of an early repayment relative to the accrual date determines whether you benefit in the current period.

This is relevant when calculating the true saving from an early repayment, particularly on revolving facilities. For more on early repayment costs and savings, see Will I pay a charge to repay early?