If you’ve missed due dates on multiple payments you may have heard the term ‘arrears’. It’s a financial term that refers to the status of a company or individual’s payment in relation to their due date. In other words, if you’ve missed payments that you’re contractually obligated to pay, then your account could go into arrears.
Let’s get to the following commonly asked questions:
An arrear payment can have multiple meanings depending on the context it's applied to. Here are the different arrears definitions.
Call-in-arrears is used in the context of shareholders, and refers to when a portion of ‘called up capital’ has not been paid by a shareholder within a designated time period. If the shareholder fails to pay the amount specified within the time period, then they go into call-in arrears.
Annuities in arrears refers to real estate mortgages. In simple terms, it is the payment of an equal amount of money paid on a regular basis. If you have a handle on your personal finance, you’ll have annuities in arrears.
If a company is dividend in arrears, it typically means that it has failed to make enough money to pay owed dividends to its preferred stock holders. A preferred stock holder must be paid regardless of cash flow. Once the company has failed to pay, a dividend in arrears is recorded on financial statements.
An arrears swap sets interest rates at the end of the payment period rather than the beginning. This is used by those who wish to predict the yield curve in hopes of paying less interest.
If you find yourself past due dates you’ll find yourself in arrears. This can be a scary situation, especially if you’ve missed multiple payments. A lot of people have found themselves in this situation for one reason or another, whether it’s because their current pay is too low or they’ve unable to work.
Understanding arrears is a great first step to sorting out your finances. If you do have an arrears account, you will have to start making regular payments to stop your debt from escalating. Most lenders will allow you to lengthen your loan so you can keep making payments.
Most debts have a time limit of six years from the date that you last wrote to your lender, or made a payment. Arrears are largely the same, however there are different types of payments that’ll get you out of arrears quicker.
Rent arrears. If you keep up with regular payments in arrears, you could be out of arrears within six months.
Credit card arrears. If you pay off your credit card debt before the six year period your account will automatically be out of arrears.
Business owners are most likely to be familiar with the term ‘paid in arrears’. It has two meanings depending on your status of payments. This term either means:
Paid in arrears most often refers to a salary arrear, i.e., a business will pay employees at the end of the working month. This helps small businesses manage cash flows and simplify their accounting books, as it gives accountants time to balance the business’s financial obligations.
For example: James starts a new job on the 12th December. According to business payroll, all employees receive their paycheck on the 28th December. Despite James starting half way through the month, he receives a smaller paycheck on payday, adjusted to the period of time he worked. This is an example of being paid in arrears.
Being paid in arrears rather than receiving a payment in advance will make very little difference to an employee, as you’re still paid on-time at the end of the month. The only difference will be that your paycheck may be more accurate, since your company is up-do-date with your hours worked. For example, if you have sick days towards the end of a month, this will be reflected in your paycheck.
Paying in arrears is a broad term that has a different meaning in corporate finance compared to personal. If you receive payment from your job in arrears this is most often a positive, since your paycheck will be up to date.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.