Arrearage is a term used to identify a situation in which a payment on some type of financial instrument is past due. The term can be applied to payments due on bank loans, mortgages, or even on certain types of stocks. Unless there are extenuating circumstances, it is usually wise to not allow obligations to become past due.
As applied to loans, mortgages, and credit card payments, arrearage refers to the amount that is past due on the account. For example, if a borrower is three months behind in making the mortgage payment, the arrearage will amount to the total of three months worth of payments. Some lenders will also include any penalties or additional interest charges applied to the past due amount as part of the arrearage, although others treat those amounts as separate line items on the account.
When associated with stocks, arrearage usually has to do with a delay in paying dividends on the shares of stock owned by an investor. In some cases, this may be planned, such as with cumulative preferred stock options. With this type of stock, the idea is to delay disbursing the dividends until some specific time in the future, even though the dividends are calculated at regular intervals. The balance of those calculated dividends are recorded on the shareholder’s account, and show as an open item until the disbursement is eventually made.
A similar process can also take place with bond issues. Many bonds are configured to delay the payment of interest until the bonds reach maturity. Over the life of the bonds, the unpaid interest is allowed to accumulate and is held by the bond issuer for the holder. Once the bond does mature, the bondholder forwards the interest, along with the original investment in the bond issue, to the bondholder and the transaction is considered complete.
While arrearage with some types of investment opportunities is simply a means of keeping track of payments that are due the investor at some specific point in the future, arrearage that is connected with consumer debt is another matter. Many lenders will only allow accounts to fall past due for a certain amount of time before action is taken to collect the payments that are in arrears, or to declare the debtor to be in default. Should an individual exhibit a continual pattern of falling behind on loan payments and similar debts, his or her credit rating is adversely affected. This situation in turn makes it very difficult to secure credit in any form in the future, until the consumer has demonstrated over time that he or she is capable of avoiding arrearage by paying all debt obligations by the dates specified by each creditor.