What Are Arrears? Meaning and Examples
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
Arrears are amounts left unpaid after their due date. A payment made in arrears has a second, neutral meaning: it is paid at the end of the period it covers, such as wages.
Key takeaways
- Arrears to date equal total amounts due up to a given date minus total amounts paid toward those dues.
- Regular on-time payments after a missed one do not clear the earlier shortfall, so the arrears remain.
- On a standard US mortgage, each monthly payment covers interest that accrued during the previous month.
- Cumulative preferred dividends skipped by a company must be paid before common shareholders get dividends.
Arrears (also written “arrearage”) are amounts that remain unpaid after their due date. If a loan, rent, utility or tax payment is due on a set day and is not paid in full by then, the unpaid part is “in arrears” until it is settled. The word has a second, neutral meaning: a payment made “in arrears” is made at the end of the period it covers, such as salary paid after the work is done or bond interest paid after it accrues. Both meanings involve paying after the period or deadline, but only the first means the payer has fallen behind.
What Arrears Means in Each Context
Overdue arrears apply to any obligation with a due date: mortgages, car loans, credit cards, rent, utility bills, taxes, child support and other court-ordered payments. Here “in arrears” means “late” or “behind,” and can lead to late fees, collection notices or other consequences set by the contract or governing law.
Payment in arrears describes timing: the payment comes after the period it pays for. Wages for the first two weeks of a month paid at the end of those two weeks, or interest paid after it has accumulated for a month, are paid in arrears. Nothing is late unless the payment misses its own due date.
In legal and administrative use, such as child support or tax notices, “arrears” almost always carries the overdue meaning: the total owed but not yet paid.
How Overdue Arrears Build Up
The amount in arrears is the gap between what was due and what was actually paid, counted from the due date:
Arrears to date = total amounts due up to a given date − total amounts paid toward those dues
This cumulative unpaid balance as of a specific day, not just the most recent missed payment, is what creditors and agencies usually mean by “arrears to date.” Late fees or penalty interest, if the agreement allows them, may be shown separately on top.
On a loan, the overdue amount can also be split. Principal arrears is the share of missed installments that would have reduced the loan balance; interest arrears is the share that covered interest. The split shows how much of the shortfall still sits on the loan itself.
Example of Arrears
Hypothetical example. A borrower has a car loan with a $500 monthly payment due on the 15th.
- January 15: the borrower pays nothing. From the next business day, the account is $500 in arrears.
- February 15 and March 15: the borrower pays $500 each time, on schedule. The account is still $500 in arrears, because the regular payments cover each new month’s installment, not the January shortfall.
- Partial payment variation: if the borrower had paid $300 on January 15 instead of nothing, the account would be $200 in arrears from January 16 until the remaining $200 is paid.
After March 15, dues to date are $1,500 and payments are $1,000, leaving $500 in arrears (before any late fees). The account is brought current only when that amount is paid, though how a new payment is split between current dues and arrears depends on how the lender applies it.
Payment in Advance vs. Payment in Arrears
| Payment in advance | Payment in arrears | |
|---|---|---|
| When paid | Before the period starts | After the period ends |
| Typical examples | Rent, many insurance premiums, subscriptions | Wages, utilities, mortgage interest, bond coupons |
| Who carries the timing risk | Payer has paid for something not yet received | Provider has delivered before being paid |
Either type can fall into overdue arrears. Rent paid in advance is overdue if not paid by the 1st; a utility bill for last month’s usage is overdue if not paid by the bill’s due date. Property tax is billed in arrears in some US jurisdictions, covering a year that has already passed, while others collect in advance.
Common Types of Payments in Arrears
Mortgage Interest
On a standard US mortgage, interest is paid in arrears. A payment due on the first of a month covers interest that accrued during the previous month. That is why closing costs often include prepaid daily interest from the closing date to the end of that month, and why the first full payment is usually due about a month later.
Payroll
Many employers pay wages in arrears: the pay period ends, payroll is processed and employees are paid for time already worked. In payroll accounting, “arrears pay” can also mean back pay owed for an earlier period, such as a missed raise or uncorrected hours, paid separately from current wages.
Annuities
An annuity is a series of equal payments at regular intervals, such as a hypothetical $250 a month for 10 years. Payments at the end of each period make an ordinary annuity, or annuity in arrears; payments at the start make an annuity due. Annuity-due payments have one extra period to earn interest, which changes present and future value calculations.
Bond Interest
Bond coupons are typically paid in arrears. If a bond pays a hypothetical $50 coupon semiannually, interest accrues for six months before the bondholder receives each payment. Some loans go further and pay all interest in arrears at maturity, rather than in installments over the loan’s life.
Dividends in Arrears
With cumulative preferred stock, a dividend the company skips does not disappear; it becomes a dividend in arrears. The company must disclose the unpaid amount in the footnotes to its financial statements, and it cannot pay dividends to common shareholders until the preferred arrears are paid. Non-cumulative preferred stock does not carry this protection.
Arrears Swaps
An arrears swap is an interest rate swap in which the floating payment is set using the reference rate at the end of each reset period instead of the beginning, and that rate is applied to the period just finished. In a plain vanilla swap, the rate is fixed at the start of the period it applies to.
Why Businesses Pay in Arrears
Paying after a period ends lets a business hold cash until the obligation is due, using it for other needs or to earn interest, which helps cash flow management. Paying wages in arrears also gives payroll time to record actual hours, overtime and deductions before money leaves the account.
Limitations and Common Confusions
- Arrears vs. default. Being in arrears means a payment is overdue. Default is a more serious status defined by the loan agreement or law, often triggered after a period of missed payments, and it can allow the lender to demand the full balance or pursue collateral.
- Arrears vs. the loan balance. Arrears are only the overdue portion. A borrower with a $200,000 mortgage who misses one payment owes the remaining balance plus the arrears, not $200,000 in arrears.
- The cost of arrears is not fixed. Late fees, penalty rates and credit bureau reporting depend on the agreement and jurisdiction; the APR and late-payment terms in the agreement show what falling behind would cost.
The Bottom Line
Borrowers, renters, employees and investors all meet the word arrears, and the context decides whether it signals a problem. A payment made in arrears is normal timing, while an account in arrears has fallen behind and stays behind until the missed amount itself is paid. Late fees, penalty rates and default terms depend on the agreement and jurisdiction, so the contract shows what falling behind would cost.
