What are Arrears? Types of Arrears in Finance

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What are Arrears?

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What are Arrears?

Arrears is a financial and also legal term that simply refers to the status of payments in relation to their due dates. The word is simply or most commonly used to describe an obligation or liability that has not yet received payment by its due date. Therefore, the term “arrears” simply refers to an overdue payment.

If one or more payments are missed where regular payments are contractually required, such as mortgage or rent payments and utility or telephone bills, the account becomes delinquent. Payments that have been made at the end of a period are also said to be in arrears. In this case, the payment is then expected to be made after the service is simply provided or completed—not before.

An Example of Arrears

For example, if your next $500 loan payment is due on Jan. 15 and you simply miss the payment, you are in arrears for about $500 as of the next business day.

If you then continue making regular payments each month after that, you are still in arrears for about $500 until the time you make up the payment you simply missed. Similarly, if you have then paid $300 of that Jan. 15 payment, you are in arrears for $200 as of Jan. 16 until the time you pay it off and also bring your account up to date.

Payment in Advance vs. Payment in Arrears

When the two parties simply come to an agreement in a contract, the payment is usually made before or after a product or service is simply provided. The payment that is made before a service is provided is common with rents, leases, prepaid phone bills, insurance premium payments, and also Internet service bills.

These types of payments are simply called or referred to as “payment in advance. When the bill then becomes overdue, say 30 days past the due date for payment, the account then falls into arrears and the account holder might then get a late notice and/or penalty.

There are even instances where bills or liabilities then come due after the service has been provided, such as utility bills, property taxes, and employee salaries. These payments are simply known as “payments in arrears,” which occur at the end of the period and are not classified as “late. They do, however, fall into arrears if you do not pay them by the due date.

Arrears can even apply to payroll accounting. When the payrolls are in arrears, the previous week’s (or some other period’s) payments are then processed and even paid out to employees as opposed to wages earned during the current period. Current pay would then instead occur as payroll and even be processed each period as it ends.

Types of Arrears in Finance

Annuity in Arrears

Arrears can even be applied to instances in the context of finance. One example is annuity payments. An annuity such as loan repayment is simply a series of equal amounts of payment that simply occurs at equal time intervals, say for $250 per month for 10 years. If the annuities are then due at the end of the period, such as the mortgage payments, they are then called an ordinary annuity or annuity in arrears.

Dividend in Arrears

Arrearage also applies to the dividends that are then due but have not been paid to preferred shareholders. Because the preferred shares simply have guaranteed dividends regardless of whether the company simply makes a profit or not, the dividends are said to be in arrears if the company misses a cumulative dividend payment.

The dividends in arrears should then be disclosed in the footnotes to the financial statement. The company is also restricted from making any dividend payouts to common shareholders until it settles its dividends payable account.

Interest in Arrears (Bonds)

Some loans have interest in arrears. This simply means that the interest is due to be paid on the maturity date of the loan, instead of in bits and even pieces during the life of the loan, like an annuity payment. Interest payments on bonds are then usually paid in arrears.

When an issuer then makes $50 coupon payments semi-annually, this simply means the interest on the bond would have to accrue for a period of six months before any payment is made to the bondholders.

Arrears Swap

An arrears swap is simply an interest rate swap that is then similar to a regular or plain vanilla swap, but the floating payment is simply based on the interest rate at the end of the reset period, instead of the beginning, and is then applied retroactively.

What Kinds of Payments Can Be in Arrears?

Any overdue payment can then be in arrears. Some of the most common types of these payments to be in arrears include payroll, mortgage, rent, car payment, child support, credit card, and taxes.

Does Arrears Mean Late?

Arrears simply refers to a debt or payment that is then still outstanding after the payment due date has passed. It is simply synonymous with the payment being late.

Is Being in Arrears Always Negative?

Not in certain contexts, such as in bond trading, when arrears is simply a reference to payments that have not been made at the end of a specified period. Mortgage interest payments are then paid in arrears and only suggest a negative connotation when the due date has passed.

Why Do Companies Often Pay in Arrears?

Paying in arrears is often beneficial to businesses as it then provides them with the time to simply have more flexibility with their cash flows instead of having to pay obligations with current cash flows; they can even accrue that cash for later payment. This also allows this accumulating cash to earn interest for the company before it is paid out.

FAQs

What Does Arrears Mean in Finance?

Paid in arrears It may sound like a complicated accounting term, but the meaning is pretty straightforward. Run the payroll and then benefits with Gusto. Get started. “In arrears” means payment is simply behind. This can then be intentional (how the contract was written) or unintentional (you or a customer missed a payment).

What Is Salary Paid In Arrears?

What does ‘paid in arrears’ mean traditionally? When your employer simply pays a salary after all the shifts in a pay period have been performed, typically several days after that pay period has ended, this is simply known as an “Arrears” payroll.

What Does It Mean To Be Paid Monthly In Arrears?

What is “paid in arrears”? “Paid in arrears” simply means that payment for a service is provided after the service has been rendered. In the financial industry, “in arrears” means that a payment is behind. The term “in arrears” can even be applied to both billing and paying.

Is arrears salary taxable?

Yes, arrears of salary are simply always taxable. When an employee then receives arrears of salary for the previous years, which was not taxed earlier on the due basis, the salary received is taxed on a receipt basis.

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