Legal Definitions - daily balance

Daily Balance

The daily balance refers to the exact amount of money recorded in an account at the end of a specific day. This figure is crucial because it is often the basis for calculating any interest earned by the account holder or any interest owed by the account holder for that particular day.

• Savings Account Interest: Imagine a person has a savings account that accrues interest daily. On Tuesday, after all deposits and withdrawals for the day have been processed, the account shows a final amount of $10,000. This $10,000 is the daily balance for Tuesday, and the bank will use this specific amount to calculate the interest earned for that single day.

  This illustrates the term because the $10,000 represents the final accounting for that day, directly influencing the daily interest calculation.

• Business Line of Credit: A small business utilizes a line of credit. On Thursday, after making a payment and then drawing additional funds for payroll, the outstanding principal balance on the line of credit is $50,000. This $50,000 is the daily balance for Thursday, and the lender will calculate the interest owed by the business for that day based on this amount.

  This example demonstrates the daily balance as the precise amount at the end of the day, which serves as the foundation for determining the interest charge for that specific day.

Average Daily Balance

The average daily balance is the average amount of money present in an account over a specific period, typically a billing cycle or a month. It is calculated by summing up the daily balance for each day within that period and then dividing by the total number of days in the period. This average figure is widely used by financial institutions to determine interest charges, finance fees, or interest earned on an account over the entire period.

• Credit Card Interest Calculation: A credit card statement covers a 30-day billing cycle. Throughout this month, a cardholder makes several purchases and payments, causing their outstanding balance to fluctuate daily. The credit card company calculates the daily balance for each of those 30 days, adds them all together, and then divides by 30 to arrive at the average daily balance. This average is then used to compute the total interest charged for that entire billing cycle.

  This illustrates the term as the average daily balance provides a fair representation of the outstanding debt over the entire period, which is then used to calculate the finance charge.

• Interest-Bearing Checking Account: A business maintains a checking account that offers interest on its deposits. Over a 31-day month, the business has numerous deposits and withdrawals, causing the account balance to change frequently. To determine the interest payment for that month, the bank calculates the daily balance for each of the 31 days, sums them up, and divides by 31. The resulting average daily balance is then multiplied by the interest rate to calculate the interest earned by the business.

  This example shows how the average daily balance smooths out daily fluctuations to provide a single figure for calculating interest earned over a longer period.

• Student Loan Interest: A student loan might accrue interest based on the average daily balance of the outstanding principal over a quarter. If the student makes an extra payment mid-quarter, or if interest capitalizes, the daily balance changes. The lender will sum the daily principal balances for all days in the quarter and divide by the number of days to get the average daily balance, which then forms the basis for calculating the interest accrued for that quarter.

  This demonstrates the average daily balance as a method to account for changes in the principal amount over time, ensuring interest is calculated fairly across the entire period.