Legal Definitions - anatocism

Anatocism refers to the practice of calculating interest not only on the original principal amount of a debt or investment but also on any accumulated, unpaid interest from previous periods. In simpler terms, it is interest charged on interest, commonly known as compound interest.

Here are some examples to illustrate this concept:

• Credit Card Debt: Imagine a consumer who has a balance on their credit card. If they only make the minimum payment or no payment at all, the interest for the next billing cycle will be calculated not just on the initial purchases, but also on the unpaid interest that accrued from the previous month. This continuous calculation of interest on both the principal and the accumulated interest is a common application of anatocism.

• Business Loan Default: A small business takes out a loan with a bank. The loan agreement states that if interest payments are missed, the unpaid interest will be added to the outstanding principal balance. Subsequently, future interest calculations will be based on this new, higher principal amount, which now includes the previously unpaid interest. This mechanism, where interest is charged on the interest that was not paid, is an example of anatocism.

• Legal Judgment Interest: A court orders a defendant to pay a plaintiff a specific sum of money, and the judgment includes a provision for interest to accrue on this amount until it is fully paid. If the judgment further specifies that any accrued but unpaid interest will itself begin to earn interest over time, this would be an instance of anatocism applied to a legal award, where the interest itself becomes part of the principal for future interest calculations.