Legal Definitions - New York interest

New York interest, also widely known as the "United States Rule," is a method for applying partial payments made on a debt that accrues interest. Under this rule, when a debtor makes a payment that is less than the total amount owed, the payment is first used to cover any interest that has accumulated since the last payment or the start of the loan. Only after all accrued interest is satisfied is any remaining portion of the payment applied to reduce the principal balance of the debt.

A key aspect of this rule is that if a payment is insufficient to cover all accrued interest, the unpaid interest does not get added to the principal (it does not "compound" into the principal). Instead, interest continues to accrue on the original principal amount until a subsequent payment is large enough to cover all outstanding accrued interest. This method is generally considered to be the most equitable approach and is the standard in most U.S. jurisdictions, contrasting with other methods like the "Boston Rule" which can be more favorable to the creditor.

• Example 1: Home Mortgage Payment
  Sarah has a home mortgage with an outstanding principal of $250,000 and an annual interest rate of 4.8%. In a particular month, $1,000 in interest has accrued. Sarah makes a partial payment of $1,500.

  Under the New York interest rule, the first $1,000 of her $1,500 payment would be applied to cover the accrued interest. The remaining $500 ($1,500 - $1,000) would then be applied to reduce her principal balance, bringing it down to $249,500. Interest for the next period would then be calculated on this new, lower principal amount.

• Example 2: Small Business Loan Default
  A small business, "Green Gardens LLC," owes its bank $75,000 on a business loan at 7% annual interest. Due to a slow sales quarter, $2,000 in interest has accrued, but Green Gardens LLC can only afford to make a payment of $1,000.

  According to the New York interest rule, the entire $1,000 payment would be applied to the accrued interest. Since the payment is less than the $2,000 accrued interest, the principal balance of $75,000 remains unchanged. The remaining $1,000 in unpaid interest continues to accrue, and interest for the next period will still be calculated on the $75,000 principal until a payment covers all outstanding interest.

• Example 3: Personal Loan Repayment
  Mark borrowed $5,000 from a friend, agreeing to pay 5% annual interest. After several months, $125 in interest has accumulated. Mark sends a payment of $200.

  Applying the New York interest rule, the first $125 of Mark's $200 payment would be used to satisfy the accrued interest. The remaining $75 ($200 - $125) would then be applied to reduce the principal balance of the loan, bringing it down to $4,925. Interest for the next period would then be calculated on this new, lower principal.