What is it?
Payments owed after you've already received an item or service, whether owing to a contractual agreement or a late payment, are referred to as arrears. Arrears is a term used to describe a payment that is past due. You're in arrears if you've missed one or more payments on your mortgage, credit card bill, child support, or anything else. Payment in arrears isn't necessarily a bad thing; it may also refer to a scenario in which you pay for products and services at the conclusion of a term (like a mortgage or utility bill). Payment in advance, on the other hand, entails the transfer of cash in advance.
Let's pretend Phoebe leases a $5,000-per-month apartment. Phoebe misses her rent payment on the first of the month in September. Phoebe will begin paying her rent on October 1st. She hasn't paid the $5,000 she owes for September's rent, so she's still behind on her payments.
Even if you finally show up and work to the conclusion of your shift, you'll have to make up the hours you missed in order to complete your 40-hour workweek. Similarly, if you have a payment in arrears, you must make up that missing payment even if you have paid on time in future months.
What are the different types of arrears?
1. Payments that are past due
Payments paid after a good or service has been given are referred to as arrears. While this has a negative connotation, there are other sorts of arrears that aren't as bad:
Consider the case where you failed to pay your Wi-Fi bill last month. You are now behind on a payment. Even if you pay your Wi-Fi fee on time the next month, you still have a problem: you haven't paid your Wi-Fi provider for the delayed payment. Until you pay the bill for the month you skipped, this sum will stay in arrears.
2. After-the-fact payment
Payment in arrears isn't always an issue; in certain cases, it's a requirement of the contract.
Payment is frequently agreed upon after goods and services are delivered. Someone is still paying a bill by the due date in this situation; it's only that the due date is after the products or services have been exchanged. Consider payments in arrears as if you were eating at a cafe. In most cafe, the waiter takes your order and delivers your food and beverages to you. You've finished the drinks and consumed the cafe’s goods, but you haven't yet paid for them. In other words, you are behind on your payments. But don't worry - it's OK.— You don't have to pay for the food until you've eaten it, according to the cafe's agreement. So, you don't have a late payment while you're behind on your payments.
What is the difference between payment in advance and payment in arrears?
When one party provides another with an item or service, they usually agree on when payment will be made. Payment in advance or payment in arrears are frequently included in the contract.
1.In advance payment.
Many contracts require you to pay in advance. Your landlord, for example, may require you to pay rent at the beginning of each month in order to continue living in the property that month. Internet access, prepaid phones, and insurance are all examples of payment in advance.
2.Payment in Arrears
Other contracts require payment in arrears, which means you pay after you receive the products or services. When you get a paycheck, you're getting paid in arrears since the compensation is for labor that was done before.
In certain states, payment in arrears is also the norm for utility bills and property taxes. Even though they aren't late, these are payments in arrears since the parties agreed to pay the bill after they traded goods or services.
Whether a contract involves payment in advance or payment in arrears, you might have a late payment. You must pay the bill before the due date, regardless of when you have to pay it. If you don't, the payment will be late.
What is the relationship between arrears and investing ?
When it comes to investing, arrears may also be a problem. Corporations that are publicly traded pay dividends to their shareholders. Dividends are frequently promised to preferred investors regardless of the company's profitability. A company is in arrears if it fails to pay preferred investors dividends on time, and it must eventually make up the shortfall. Past-due dividend payments can affect a company's reputation and profitability. Investors may be put off by the fact that this information must be published on a company's financial statement.
Arrears also play a role in bond investing. Bond interest is frequently paid in arrears, which means bondholders are paid after the interest has accumulated, usually every six months.
What is the relationship between arrears and mortgages?
Rent is generally paid in advance — rent is paid at the beginning of the month in which the tenant intends to dwell in the property. Mortgage payments are made in a unique way: Home loans generally demand payment in arrears, which means you are paying for the prior month's mortgage.
One difference between a mortgage payment and a rent payment is that mortgage payments contain interest, which you cannot pay until it has accumulated. As a result, when you pay your mortgage bill in February, you are paying the interest that has accumulated since January.
While mortgage payments are often in arrears, it is also conceivable for a mortgage payment to be in arrears just because it is late. Making up missing payments as soon as possible is a smart idea, since failing to do so might result in late penalties or even foreclosure. If you can't afford to make up the difference, speak with your mortgage lender to see if a payment plan can be worked out.
If your payments were late because your mortgage payment was too high, you may lower your payment by refinancing your mortgage or extending the term to a longer period. You might be able to capitalize these late payments on your mortgage, which means you'll pay them off over the course of the loan's life.
If you are behind on your mortgage payments and are unable to make them, you may be able to prevent foreclosure by selling your house (a short sale may be an option if you owe more than the home is currently worth and your lender approves). You may not be able to sell after the foreclosure process begins. If you don't execute a short sale, you'll have to pay the whole amount in arrears, including the late payments, when you sell the house.
What are child support arrears?
Past-due child support payments are referred to as child support arrears. The noncustodial parent (the parent who does not have primary custody) usually sends these payments to the custodial parent (the parent with primary custody).
If you owe child support and haven't paid it on time, state authorities may step in to assist you in collecting it. This might take the form of wage garnishments (where the government deducts money from your salary), tax withholding (where money is deducted from your tax refund), having your driver's license revoked, or being held in contempt of court (a misdemeanor that entails disobeying a court order and can result in penalties or prison time) A court might also add interest on child support arrears, causing the total amount owing to rise.
You may owe child support arrears to the state rather than the custodial parent in some circumstances, such as if the primary parent got public help to care for their kid.
Arrears in child support do not go away when the kid becomes an adult. All arrears must be paid back eventually, no matter how old the child is today.