Borrowers Beware: The Deceptive 365/360 Method of Calculating Interest







Standard Method of Interest Calculation (30/360)








Comparing the Methods



 Using 30/360: $372,091.99

Using 365/365: $372,145.78

Using 365/360: $374,029.16


The Legality of 365/360




Know the Interest Calculation Method






22 Responses to Borrowers Beware: The Deceptive 365/360 Method of Calculating Interest

  1. Judy Mason says:

    Love your article but your very last sentence is wrong. Your formula is listed backwards. Yours states (annual rate divided by 365 then multiplied by 360).
    It should read (annual rate multiplied by 365 then divided by 360).
    You really had me scratching my head for a minute because the way you have it written comes up with a lower interest rate instead of a higher rate which contradicts what your whole article is written about. LOL

    • Gregg Willich says:

      Thank you for your comment, Judy. The last sentence talks about having the interest rate adjusted to counteract the effect of 365/360 to reflect the interest rate actually agreed upon. To do that, you would need an interest rate that is lower than what was stated. The reason why you would multiply the interest rate by 360 then divide by 365 is because the product of multiplying 365/360 by 360/365 is one. For example, a borrower believes she is getting a 6% interest rate, but finds out at closing that the interest is calculated on a 365/360 basis. To achieve an effective interest rate of 6%, she would need to multiply 6% by 360/365, which would result in a rate of 5.92%. A loan with a rate of 5.92% using 365/360 is very similar to one with a rate of 6.00% using 365/365.

      Using the example in the blog post, the balloon payment after 5 years for each situation would be as follows:

      6% using 365/365 = $372,145
      5.92% using 365/360 = $372,195

      As you can see, the difference is only $50 after 5 years (whereas 6% using 365/360 = $374,029). Is a lender likely to make a change at closing? No. But, at the very least, you can make the lender feel uncomfortable for putting you into that position.

  2. JOHN ROJAS says:

    Thank you for a great explanation of the process and the rationalization for it as well as how to be leery of those institutions that would prey upon borrowers for such a small gain compared to the loss of respect they could suffer.

  3. Gregg Willich says:

    You’re welcome, John! Thank you for commenting.

  4. John H. Dow says:

    Just closed a loan in Georgia and questioned the lender about the difference in the amortized balance owed at the end of a 10 year note ($5000.00)? The 365\360 basis for interest accrual was the cause. Is this practice legal in Georgia?

    • Gregg Willich says:

      I am sorry to hear that, John. Being a Wisconsin attorney, I am not sure exactly where Georgia lands on the subject. Try contacting a local attorney. Best of luck!

  5. Charles Sewell says:

    This is a great explanation. Thank you very much. I recently encountered this deceptive practice when I realized the fees I am being charged on a monthly basis for “Hard to Borrow” short interest are larger than they should be based on the interest rates my on-line broker tells me I’m being charged. The difference is explained (to the penny) by 365/365 versus 365/360. As my father used to say, “What a racket!” Are brokerage firms required to disclose their use of 365/360 in written documentation in order to legally employ this method of calculating margin interest and hard to borrow interest?

    • Gregg Willich says:

      I am glad you found the post to be helpful, Charles. In Wisconsin, the lender would have to disclose the calculation method “in the note, bond, or other instrument.” Many times, the disclosure is not seen until closing.

  6. Tariq Rashdi says:

    I just closed Loan in Missouri $850 K ( was quoted 4.45% for 4 year fixed with 20 year amortization) …At closing even the banker was not aware why the payments were not coming as calculated by amortization calculators ..till we find this was 365/360 interest calculation . Its was hidden in the terms ..I reluctantly signed the loan since its just too late to do anything else but I am not a happy customer …I have asked the banker to adjust his loan fees etc to compensate a bit ..but he did not want to do anything ..knowing I had no options……..Not all Banks do this loan resulted in $30 /month more in payments and $4000 more in loan balance after our 4 year term.

    • Gregg Willich says:

      If you do not know about 365/360, you may not think to ask the lender about the basis for calculating interest before closing. Once you get to closing and discover it in the note, there really is little that you can do. At least you made the lender feel uncomfortable, and you will know to look for it the next time around.

  7. Tim says:

    Is the method for constructing an amortization table in the CFR?

  8. Angus says:

    Very nice article, exactly what I wanted to find.

  9. We closed on a $1M refi today and learned of 365/360 calc (it just seemed a bit odd) 1/2 hr before closing then did some quick research on the web and came across your article. After some discussion with the lender, the promissory note was revised using 30/360 which was in-line with the rate in the term sheet of 4.25% (effective APR actually came to 4.21%!). The experienced commercial banker had never had a client bring this up and spent considerable time on the phone with his credit officer. Furthermore, lender not happy about his reduced APY. My thinking is that most front-line bankers don’t understand this but credit officers do! Great learning lesson for all thanks to you! Thank you!!

    • Gregg Willich says:

      You’re welcome, Mike! It’s great to hear you were able to remedy the situation! That certainly makes a considerable difference on a $1 million loan.

  10. P Emerson says:

    I’ve closed CRE loans for many years in the PNW and haven’t seen a 30/360 calculation in over a decade. In my experience at large and small financial institutions, 365/360 is standard practice and it is called out clearly in the loan documents. I have worked with many large developers and it has only been questioned once by one inexperienced borrower. Experienced borrowers know that this is the industry standard and no bank would change the calculation at the last minute to appease a borrower. At large institutions – 365/360 would be a policy requirement.

    • Gregg Willich says:

      Thank you for your input, P Emerson. I will start by agreeing with you that 365/360 is common for commercial loans, and it is called out in the note (as required); however, that is generally the only place it appears and is regularly not seen until closing. Often times, borrowers do not read the note that closely, and the amount of time at closing is hardly sufficient to look it over thoroughly, anyway. Also, just because a borrower does not question the method or the note, does not mean the borrower understands what is going on (actually, the opposite is probably more accurate for less experienced borrowers who don’t want to look unprepared or unknowledgeable). There is a reason this post regularly receives around 1,500 views per month (which is a lot for a website that hardly generates content and does little in the way of SEO). The goal of this post is to educate borrowers of this practice, which in my opinion is shady and counter-intuitive, regardless of whether it is “standard practice.” It takes a computer system no more effort to divide by 365 than to divide by 360. Finally, I am genuinely curious as to how you stumbled upon this post. Based on your remarks, I think it is safe to assume you have closed many 365/360 loans, and all of them were without any incident, except for that “one inexperienced borrower.” If true, I’m not sure what would compel you to search for or read about 365/360?

  11. G.Kine says:

    How about if the note for normal monthly payments is calculated using a 365 day year…. but then the lender calculates the prepaid interest, for the month of closing, using a 360 day year? Something does not seem right… should be either one way or the other….thoughts?

    • Kyle says:

      I’m dealing with this same thing right now. Can’t figure it out…For my month of closing, My “Fee Worksheet” shows prepaid daily interest calculated at 365 day year. The Official Loan Estimate used the 360 day year to calculate first month prepaid.


  12. mahesh patel says:

    good article and eye opening,they did it to me ,sadly i did not read the note until today!
    p.s i have designed amortization in excel which can calculate any method one can select at ease,
    so i think banks are lying as my programme can do it easily so they can do too!

  13. Angelique says:

    Greg, I would love to share your article on our company blog on our web site. This is an issue that my brokers and I have a great deal of passion about. We very much agree with your analysis of the motivation behind this practice. How do I connect with you to obtain your permission to share it?

  14. Mike says:


    Nice job, lawyers rock!

    It took me a while to figure out how my credit union was chapping me on my SBA loan and this helped confirm it. They never disclosed it either. When I asked early in the process they never even got back to me. I saved the emails, but what does it matter.

    Many thanks,


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