Day Count Conventions: Actual/360 vs. Actual/365. Which Costs You Less?

When you’re evaluating a business loan offer, you zero in on the interest rate. A 6% loan is better than a 6.5% loan, right?

Not necessarily.

Many savvy business owners overlook a critical detail buried in the loan agreement that can significantly alter the true cost of capital: the Day Count Convention.

This seemingly minor technicality governs how your interest is calculated. Choosing one convention over another can cost your business thousands of dollars, even if the stated annual rate is identical.

What is a Day Count Convention?

In simple terms, the day count convention is the method used to translate an annual percentage rate (APR) into a daily charge. It’s the formula that determines the “Time” factor in this equation:

Interest Accrued = Principal Balance × (Annual Interest Rate) × (Time Factor)

The “Time Factor” is where lenders can differ. The two most common conventions in the U.S. commercial lending market are Actual/360 and Actual/365.

The Two Main Conventions in U.S. Business Lending

1. Actual/360 (The Industry Standard)

This is the most prevalent method for commercial loans, lines of credit, and many other financing products.

• How it works: Your interest is calculated using the actual number of days the loan is outstanding, but the annual rate is divided by 360 to get the daily rate.
• The Impact: This method is more expensive for borrowers. Why? Because you are effectively paying interest for 365 days a year, but your daily rate is calculated on a 360-day year, slightly inflating the effective annual cost.

2. Actual/365 (Less Common, but More Intuitive)

• How it works: Interest is calculated using the actual number of days in the period, and the annual rate is divided by 365.
• The Impact: This method is straightforward and aligns with the calendar year. It results in a slightly lower cost for borrowers compared to Actual/360 with the same stated rate.

A Concrete Example: Seeing the Real Difference

Let’s say your business takes out a $500,000 loan at a 6% annual interest rate. You have a payment due after a 90-day period.

With Actual/360:

• Daily Rate = 6% / 360 = 0.016667% 

• Daily Interest Accrual: $500,000 × 0.00016667 = $83.33

• Over 90 days: $83.33 × 90 = $7,500

With Actual/365:

• Daily Rate = 6% / 365 = 0.016438% 

• Daily Interest Accrual: $500,000 × 0.00016438 = $82.19

• Over 90 days: $82.19 × 90 = $7,397.10

The Bottom Line: By using the Actual/360 method, you pay $102.90 more in interest for that single period. Over the life of a multi-year loan, this difference compounds into a substantial sum.

The Hidden “Rate Bump” of Actual/360

The use of Actual/360 creates a hidden increase in your effective interest rate. A loan with a stated 6.00% rate under Actual/360 has an Effective Annual Rate (EAR) of approximately 6.11%.

This is a critical insight for cost comparison. A loan at 5.95% (Actual/360) could actually be more expensive than a loan at 6.00% (Actual/365).

Actionable Advice for Business Owners

1. Read the Fine Print: Never sign a term sheet or loan agreement without finding the section titled “Interest Calculation,” “Payment Terms,” or “Definitions.” Scan for the phrase “on the basis of a 360-day year” or “Actual/360.”
2. Ask the Direct Question: When your lender presents an offer, ask: “What day count convention do you use to calculate interest?” Their answer will tell you everything you need to know.
3. Compare Apples to Apples: When shopping for loans, normalize the rates. If one lender offers 5.8% (Actual/360) and another offers 6.0% (Actual/365), you must calculate the interest for a comparable period to see which is truly cheaper.
4. Use it as a Negotiating Point: While large banks may be inflexible, some smaller lenders or credit unions might be willing to use Actual/365, or you could use this knowledge to negotiate a slightly lower nominal rate to offset the effect of the Actual/360 method.

The Takeaway

As a business leader, your job is to manage costs. Understanding day count conventions is not just a technicality—it’s a fundamental part of financial literacy that directly impacts your profitability. By looking beyond the headline interest rate and understanding how your interest is calculated, you empower yourself to make truly informed decisions and ensure you’re getting the most competitive deal for your business.

Next time you review a financing offer, don’t just ask for the rate—ask for the convention. Your bottom line will thank you. Our business loan quick review includes checking which day count convention is applied to your repayment schedule.