Per Diem Interest – Definition

Cite this article as:"Per Diem Interest – Definition," in The Business Professor, updated January 24, 2020, last accessed October 26, 2020,


Per Diem Interest Definition

Per diem interest is interest charged on a loan at a daily rate, as opposed to the monthly or annual percentage rate. Generally, a loan incurs a per diem interest rate when a borrower makes a payment on the loan that is earlier than the expected payment date. Because this payment reduces the principal beyond what is calculated for the monthly interest rate, a per-diem interest rate or daily interest rate applies for the remainder of the days until the next payment period.

A Little More on What is a Per Diem Interest

Borrowers should look out for per diem interest when opting for a loan. Per diem interest offers borrowers convenient and flexible loan repayment method. For example, If a lender demands that a borrower make payments on a loan on the first day of each month then the per diem interest will be the days adding up to the first full monthly payment cycle. lenders have choices of structuring their per diem interest payments the way the wish, even offer borrowers an option of paying back the loan exactly the first month it was collected or the next month.

 Calculating Per Diem Interest

If payment is being made on the first day of the month as requested by the lender, then the per diem interest is calculated by the number of days till the first payment circle. Some lenders may request fir the per diem interest to be paid upon the expiry of the loan payment period. Another way is that the lender may allow the borrower make partial per diem interest on the first day of the following month after a loan has been issued and the principal is paid.

A daily interest rate is used by the lender to possibly result to the borrower’s daily interest. This daily interest rate is multiplied against the number of days specified in the per diem interest period.  The results gotten here is the per diem interest.

To cite an example, a borrower’s mortgage loan of  $100,000 with a fixed interest rate of 4.75% for 30 years with the principal paid on July 29. The lender demands as agreed that the per diem interest is paid three days before the first day of the next month. Note that a lender can decide if they are adding daily principal payments to the per diem interest or begin the loan repayment on the first day of the month. Using a daily interest rate of 0.013% (0.0475 against 365 days), the borrower must pay the lender $39 (0.00013 x $100,000 x 3) in per diem interest.

The loan repayment starts on August 1, the first-month payment is due on September 1. This payment in September covers interest and principal for the month of August.

References for “Per Diem Interest › Personal Finance › Mortgages › Glossary › P

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