Hong Life CalculatorsUnderstanding the overdraft interest calculator — concept and principle
Overdrafts, personal credit lines and home equity lines usually charge interest only on the amount you actually use, calculated day by day. This calculator estimates the interest on an average balance over a number of days, the daily interest charge and the effective annual rate when interest is added to the balance monthly. Use it to check a statement, compare credit lines or see what a short-term shortfall costs.
How it is calculated
- Daily interest = balance × annual rate ÷ 365.
- Simple daily interest for the period = balance × annual rate ÷ 365 × days.
- With monthly compounding: balance × ((1 + rate ÷ 12)^(days ÷ (365 ÷ 12)) − 1).
- Effective annual rate (monthly compounding) = (1 + rate ÷ 12)^12 − 1.
The balance is the average daily balance used during the period.
The principle
Interest is the price of borrowing money for time, so it is proportional to both the amount borrowed and the number of days. Lenders quote a nominal annual rate and divide it into a daily rate. When unpaid interest is added to the balance, the next month's interest is charged on that interest too, which is why the effective annual rate is slightly higher than the quoted rate. Some lenders, especially for business lines, divide by 360 instead of 365, which raises the daily rate slightly.
Worked example
Default inputs: average balance $5,000, 9% a year, 30 days, simple daily interest.
- Daily interest: 5,000 × 0.09 ÷ 365 = $1.23.
- Interest for 30 days: 1.2329 × 30 = $36.99.
- Effective annual rate if compounded monthly: (1 + 0.09 ÷ 12)¹² − 1 = 9.38%.
With monthly compounding selected, the 30-day interest is almost the same ($36.98), because 30 days is just under one month.
How to read the result
The period interest is what you would pay if the average balance stays the same. Doubling the balance or the days doubles the interest. Compare the effective annual rate across products rather than nominal rates. Arranged overdrafts and credit lines are often cheaper than card cash advances, but fees and minimum charges can add to the cost.
Common mistakes
- Using the credit limit instead of the balance actually used.
- Ignoring monthly fees or unarranged overdraft charges, which this does not include.
- Assuming 365 days when your agreement uses 360.
- Treating a credit line as long-term borrowing, where interest keeps compounding.
Frequently asked questions
How much is $5,000 at 9% for 30 days?
About $36.99 with simple daily interest on a 365-day year.
Is overdraft interest charged on weekends?
Daily interest normally accrues every calendar day on the outstanding balance.
Why is my statement slightly different?
The daily balance changes, and your lender may use a different day-count or rate during the period.
Sources: Consumer Financial Protection Bureau, Regulation Z (Truth in Lending), 12 CFR Part 1026 · Brealey, Myers and Allen, Principles of Corporate Finance (effective annual rates)