Payments in advance and payments in arrears are two distinct types of payments, though they are related when it comes to an overdue payment. These terms are commonly confused and misunderstood, so it is helpful to learn what each payment truly means and how they are related to each other. This can be beneficial in better understanding your loan payment structure and finance in general.
Payment in Arrears Explained
The term “arrears” refers to the status of loan repayments with respect to the due date of those repayment installments. Most commonly, arrears are used synonymously with a late or overdue payment.
Arrears can have both financial and legal implications. For example, mortgage arrears can lead to the lender terminating your mortgage loan and foreclosing on your property. However, the term arrears can also have different meanings depending on the context of the situation that it is being used in.
Payment in arrears can refer to two different situations. First, payment in arrears can refer to when compensation is provided to a service provider after the agreement terms have been satisfied. In this case, payment in arrears is an accounting term that signifies when payment will be made in relation to the service. Second, payment in arrears can also refer to when an individual is late on making their repayments, for example being late on mortgage repayments. In this case, payment in arrears refers to missing a payment causing it to be overdue. Therefore, payment in arrears does not always mean something negative like a late payment.
Payment in Advance Explained
Payment in advance refers to when payment is made in advance of the completion of a service or before a product has been provided. There are many types of obligations that may be paid for using a payment in advance pay structure. For example, payments in advance are common with services such as rent payments, leases, prepaid utility bills, etc.
Relationship Between Them
Although payment in arrears and payment in advance can describe two different types of pay structures, they can also be connected. For example, a renter has a payment in advance pay structure where they pay rent for the upcoming month at the end of the previous month. If they do not pay the upcoming month’s rent at the end of the previous month, the rent payment becomes overdue – it becomes a payment in arrears. Therefore, a payment in advance can become a payment in arrears if the bill is not paid by the due date.