Definition
In Arrears denotes a financial situation where a payment is overdue or has not been paid by the agreed-upon time frame. It generally has two primary meanings:
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At the End of a Term: This usage indicates that payments, such as interest on mortgage loans, are made after the period they cover. For example, mortgage interest is frequently paid at the end of the month it accrues, rather than in advance. This can apply to various contexts, including utility bills and salaries where the payment occurs after services have been rendered or after a period has ended.
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In Default: This refers to a scenario where due payments have not been made by their deadline, meaning the account or person is overdue. This can apply to any overdue payments such as loans, rent, or utilities.
Examples
- Interest Payments: Homeowners usually pay mortgage interest in arrears, meaning the payment for September’s interest is paid at the end of September or beginning of October.
- Utilities: Utility bills, like electricity or water, are typically paid in arrears – after the service has been provided based on meter readings or usage estimations.
- Employee Salaries: An employee receiving their salary at the end of the month for the month worked is being paid in arrears.
- Overdue Rent: If rent due on the 1st of the month is unpaid by the 15th, it is considered in arrears.
Frequently Asked Questions (FAQ)
1. What does “paying in arrears” mean?
Paying in arrears means making a payment after the service period, loan period, or bill. For instance, monthly salaries typically paid at the month’s end are paid in arrears.
2. What is the difference between “in arrears” and “advance payment”?
In arrears means after the period, while advance payment involves payment at the start or before the provided service or term.
3. Are mortgage interest payments usually in arrears?
Yes, mortgage interest is typically paid in arrears, meaning the interest for a given period is paid after that period has ended.
4. Can utilities be paid in arrears?
Yes, utility bills like electricity, gas, and water are usually paid in arrears because they are billed after usage is measured.
5. What happens if rent is in arrears?
If rent is in arrears, it means the rent due has not been paid by the agreed date and is now overdue.
Related Terms
- Advance Payment: Payments made before the service or term begins.
- Default: Failure to meet the legal obligations or conditions of a loan or other obligation.
- Delinquency: A state of being overdue on obligations such as loans, typically synonymous with arrears.
- Deferred Payment: An arrangement where the payment is postponed to a future date.
Online References
Suggested Books for Further Studies
- Accounting Made Simple: Accounting Explained in 100 Pages or Less by Mike Piper
- Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas Ittelson
- Payback Time: Making Big Money Is the Best Revenge! by Phil Town
Fundamentals of Arrears: Accounting Basics Quiz
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