Arrears

Meaning and Definition

Arrears refer to the unpaid or overdue payments on a loan or credit agreement. When a borrower fails to make their scheduled payments on time, they fall into arrears. It indicates that the borrower has fallen behind on their repayment obligations.

Why it is important to know

Arrears have financial implications for both the borrower and the lender. For the borrower, it can lead to additional fees, penalties, and a negative impact on their credit score. For the lender, it represents a risk of potential default and loss of repayment. It is important for borrowers to promptly address arrears to avoid further financial difficulties.

Example in car finance

Suppose a borrower has a car finance agreement with monthly instalments. If the borrower fails to make a payment by the due date, they will be in arrears. The lender will typically contact the borrower to remind them of the outstanding payment and may apply penalties or late fees. It is crucial for the borrower to communicate with the lender and make arrangements to bring the account out of arrears by paying the overdue amount.