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Interest Calculation Formula:
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The interest calculation formula calculates interest on overdue invoices based on the invoice amount, annual interest rate, and number of days the payment is late. This helps businesses recover costs associated with delayed payments.
The calculator uses the formula:
Where:
Explanation: The formula converts the annual interest rate to a daily rate by dividing by 365 days, then multiplies by the number of days late and the invoice amount to calculate the total interest.
Details: Calculating interest on overdue invoices is important for businesses to compensate for the time value of money, cover administrative costs of chasing payments, and encourage timely payments from customers.
Tips: Enter the invoice amount in currency units, annual interest rate as a percentage, and number of days the payment is late. All values must be valid positive numbers.
Q1: Why divide by 365 in the formula?
A: Dividing by 365 converts the annual interest rate to a daily rate, as there are typically 365 days in a year.
Q2: Can I use this for compound interest calculations?
A: No, this formula calculates simple interest only. For compound interest, a different formula would be needed.
Q3: What's a typical interest rate for overdue invoices?
A: Rates vary by jurisdiction and contract terms, but typically range from 1-2% per month (12-24% annually) above the base lending rate.
Q4: Are there legal limits on interest charges?
A: Yes, many jurisdictions have usury laws that limit the maximum interest rate that can be charged. Always check local regulations.
Q5: Should interest be calculated on including or excluding tax?
A: Typically, interest is calculated on the principal amount excluding taxes, unless otherwise specified in the contract.