is a legal term for a type of debt
which is overdue after missing an expected payment. It is also used (in the form in arrears
) for payments that occur at the end of a period.
Arrears accrue from the date on the first missed payment was due. The term is often used to describe being late with rent, royalties (or other contractual payments), child support, or other legal financial obligation.
An obligation is said to be in arrears if it is past due. "Arrears" is, further, not a late payment or charge for late rent, but the state of being late for rent. Charges such as this are impermissible under most Landlord/Tenant agreements.
In arrears vs. In advance
The term in arrears
used in many contexts to refer to payments made at the end
of a period, and is contrasted with in advance,
which are payments made at the start
of a period.
For instance, one generally pays rent in advance (the month's rent is due at the beginning of the month), but mortgages in arrears (the interest for the period is due at the end of the period). Likewise, job wages and salary are typically paid in arrears.
In other contexts, payments at the end of a period is referred to by the singular arrear, to distinguish from past due payments. For example, a housing tenant who is obliged to pay rent at the end of each month, is said to pay rent in arrear, while a tenant who has not paid rental due for 90 days is said to be three months in arrears.
In accounting, arrears is used in at least two situations. One use involves the past, omitted dividends on cumulative preferred stock. If a corporation fails to declare the preferred dividend, those dividends are said to be in arrears. The dividends in arrears must be disclosed in the notes (footnotes) to the financial statements. (Cumulative preferred stock requires that any past, omitted dividends must be paid to the preferred stockholders before the common stockholders will be paid any dividend.)
This is the "past due" sense.
Another use of the word arrears occurs with annuities
(an annuity is a series of equal amounts occurring at equal time intervals, such as $1,000 per month for 20 years). If the recurring amount comes at the end of each period, the annuity is described as an annuity in arrears or as an ordinary annuity. A loan repayment schedule is usually an annuity in arrears. For example, you borrow $10,000 on September 30 and your first monthly payment will be due on October 31, the second payment will be due on November 30, and so on.
This is the "end of period" sense.
swap is an interest rate swap
that sets and pays interest in arrears. In a normal swap, the interest rate is set in advance, and paid in arrears. In a LIBOR-in-arrears swap, the interest rate and payment both happen in arrears. As a consequence, the payment amount cannot be predicted ahead of time.