Nov 20, 2025
Interest should be straightforward. It’s the engine of the note and the most predictable part of the loan. But the moment you look past the headline rate—into how interest is calculated, when it’s due, and what happens when things go sideways—you quickly discover there’s more nuance than most lenders expect. This edition of The Term Sheet walks through the real considerations that shape smooth servicing and clean borrower communication, long before a loan ever boards.
Simplicity Is Key
When it comes to interest, the goal is to be simple enough that every party can follow it without friction.
In practice, most lender–borrower disputes stem from calculation quirks that weren’t communicated clearly or didn’t match someone’s expectations—title, borrower, or even internal staff. You might have a mathematically perfect structure in your underwriting model, but if your ACH amount changes every month or your payoff math confuses title, you’re inviting problems that don’t need to exist.
The more predictable your structure, the fewer questions you’ll spend time answering. And when interest becomes delinquent or a payoff request comes in, predictability is everything.
How to Calculate Interest
There are four main calculation methods you’ll see in private lending.
30/360 — the industry default. Every month is treated as 30 days, every year as 360. It isn’t perfectly aligned with the calendar—and means some days don't have interest charged (e.g., October 31), whilst one day has extra interest (i.e., February 28/29)—but it keeps monthly payments consistent and makes borrower communication cleaner.
Actual/365 — intuitive, but uncommon. Daily rate = annual rate ÷ 365. It matches the real calendar, but leads to different payment amounts month to month, which complicates ACHs and statements. Lenders new to lending may think this is the way to go, but it can create more headaches than you might think!
Actual/360 — normally for partial months. Daily rate = annual rate ÷ 360 × number of actual days. Most lenders use this in the closing and payoff months because title companies need a clean per-diem rate. Using 30/360 in February, for example, is an invitation for confusion.
Actual/Actual — the leap-year purist. It accounts for the 366-day leap year. Accurate, but rarely worth the complexity.
Our recommendation: Keep it simple and predictable. Use 30/360 for regular months, and Actual/360 for the closing and payoff months. That structure is clean, widely understood, and easy to service.
Dutch or Not?
Dutch interest still sparks debate. For anyone newer to the term: it means charging interest on the full committed loan amount, not just the drawn balance. On a $400k construction loan with $250k drawn, Dutch interest charges against the full $400k.
It meaningfully increases revenue, which is why you see smaller, local, and more flexible lenders using it more often—especially when they’re taking on higher LTVs or offering extra borrower flexibility.
Borrowers don’t exactly celebrate it, but it can be a fair commercial structure when the lender’s capital and commitment are tied up from day one. Either way, whether you use Dutch interest or not, the key is to make it explicit and consistent. And yes—Petra can service either approach without issue.
Due Dates & Late Fees
Most private lenders follow the same pattern: Interest is due in arrears on the 1st of the following month. For example, January’s interest is due February 1st.
Late fees typically run 5–10% of the monthly interest amount, with grace periods anywhere from 5 to 15 days. The reason lenders don’t usually impose a late fee on the 1st itself is simple: the 1st often falls on a weekend or holiday, and charging a fee before a business day passes tends to cause more trouble than it’s worth.
A growing number of lenders require the first month’s interest in advance—or simply retain it as part of an interest reserve. It’s not the industry norm, but it can reduce delinquency risk and give you earlier visibility into performance issues.
Default Interest
Default interest has been getting extra attention lately—especially in California, where restrictions on default interest before maturity are currently being challenged. Outside of that, lenders generally have more flexibility, subject to usury and state-specific rules.
Broadly, lenders handle default interest in one of three ways:
Backdated — the most aggressive. Default interest applies to all unpaid interest from the start of the missed period.
Beginning of the next month — the most common. Standard interest runs through January; default interest begins February 1st.
From the actual date of default — the most lenient. If default triggers on February 10th, it accrues from February 10th.
There’s also the question of capitalization: if January interest isn’t paid, does February interest accrue on the original principal, or on the principal plus the unpaid interest? Both are valid, but monthly capitalization (not daily) is the norm. Some lenders keep monthly payments stable by deferring late fees and default interest to payoff rather than folding them into the interest-bearing balance.
How Petra Helps
No matter how you structure interest—30/360, Actual/360, Dutch mechanics, backdated default interest, monthly capitalization, or deferred fees—Petra can service it exactly as written.
More importantly, we help you avoid the traps that lead to borrower disputes:
We highlight unclear or risky structures before the loan boards.
We calculate payoffs using the precise method in your note.
We automate partial-month math so title companies get predictable numbers.
We ensure borrower statements, ACHs, and interest schedules stay consistent.
The big takeaway: choose a structure that’s clear, predictable, and easy to repeat. However you choose to set it up, Petra will service it cleanly and consistently—so you can focus on lending, not recalculating interest for the third time in a week.
