Know the Difference: Outstanding Interest vs Interest Billed

Among the most commonly asked questions we get is “If I paid my bill, why does it still say that I have interest I owe.”  With a simple vocabulary lesson, people could understand why.  The difference is between outstanding interest vs interest billed.

Interest billed is the amount of interest that is owed at the time of your payment.  Interest accrues daily based on a simple interest formula.  So if when the bill comes you pay $100.00, $70.00 of it went to interest and $30.00 went to interest.  You paid your bills 31 days apart.  In this situation the $70.00 was your interest billed for the month.

But then the next day you notice over $2.00 worth of interest showing as “outstanding” on your account. The reason for this is because until you pay off your loan you will always have outstanding interest.  As stated above interest accrues daily.  You can never prepay interest.  As a result it gets added separately from your loan every single day.

This actually benefits you.  Unless interest is capitalized, you will never pay interest on interest.  This is the major difference between compound and simple interest and a major benefit to the borrower.

So the important thing to remember is even if interest is showing on the account the only time you have to pay it is when it is billed monthly.  Otherwise it is just telling you that it exits and allowing you one more piece of information to be on top of your loans.