To calculate average due date is important, if you want to repay or get all the loan amount on one date without losing of interest. We all know that money has big time value. Today $ 100 is more important than after one year $ 100 because today $100 may be $110 after one year due to interest on the money. Money can be used in every type of business. So, just deposit money in bank, you can get interest on your money. Due to this reason, we calculate average due date. So, today, I will explain this concept. First of all, I define average due date.
Meaning of Average Due Date
Average due date is that date of repayment of loan in which there will not any loss of interest to lender and borrower.
Steps to Calculate Average Due Date
1. When Loan is Given in Different Dates and You Want to Repay one Date without Loss
When loan is given in different dates, it means repayment will be in different dates. But, if debtor wants to repay all loan in one date without loss of interest, he will calculate average due date with following formula.
Meaning of Average Due Date
Average due date is that date of repayment of loan in which there will not any loss of interest to lender and borrower.
Steps to Calculate Average Due Date
1. When Loan is Given in Different Dates and You Want to Repay one Date without Loss
When loan is given in different dates, it means repayment will be in different dates. But, if debtor wants to repay all loan in one date without loss of interest, he will calculate average due date with following formula.
Now, we are calculating average due date with this formula.
Mr. Ram gives loan to Sham at different dates and Sham will repay his loan on following due dates.
But Sham is good accountant He wants to pay all due amount on same date, so he will calculate average due date with following ways
| Due date | Amount (A) | No. of Days from 3rd July (B) | Product (A) X (B) |
| 3rd July | 500 | 0 | 0 |
| 2nd Aug. | 800 | 30 days | 24000 |
| 11th Sept. | 1000 | 70 days | 70000 |
| 2300 | 94000 |
Average Due date = 3rd July + 94000/2300 = 3rd July + 41 days = 13 Aug.
Average due date is 13 Aug., if sham pays all his due amount on 13 Aug, he will not get loss of interest. Let me explain it.
Assuming 5% is interest rate, Sham loses interest due on his bank deposits if he pays RS. 1000 early days for 29 days. How?
He calculated Average due date 13 August but actual due date is 11 Sept. and its interest will be Rs. 4. On the other side, he will gain of interest on two delay payments. He is paying Rs. 500 on 13 Aug. instead of 3rd July. He can save 41 days interest and he is also paying Rs. 800 on 13 august instead of 2nd august. He can save 11 days interest of delay payment and both gains' total will be Rs. 4. Thus the debtor neither loses nor gains on payment of all the amounts on 13th august.
2. When Loan is given on One date and repayment is made in various installment
At that time, we will not calculate product of amount and no. of days from beginning of due date. We just calculate the average of days or months or years from due date. Following example will help you to understand this.
Rs. 10000 lent by SitaRam & sons on 1st Jan. 1996 is repayable in 5 equal installments. Annual installments commencing on 1st January, 1997. Find the average due date and calculate interest at 5% p.a. which SitaRam and Sons will recover from his debtor.
Average Due date =
Date of Loan + Sum of the number of days or months or years from the date of lending to the date of repayment of each instrumentality/ No. of installments
= Jan. 1, 1996 + 1+2+3+4+5/ 5 = Jan. 1 1996 + 3 years = 1st Jan. 1999
If debtor of SitaRam and sons will pay Rs. 10000 on 1st Jan. 1999, there will be no loss to either party.
Related : Interest Rate Risk
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