Time to Pay: Arrearages Explained

by Investing School on November 19, 2011

You have probably heard the term “being in arrears” before. Arrearages are the actual sums one owes when one is in arrears. It is the actual amount of money owed. Most commonly you will hear this term in the context of child support which is overdue, since that is an unfortunately routine situation, but it has another application as well.

Being in arrears is not always a negative thing. Some companies pay out their dividends or interest on a set schedule. Mortgages are usually paid with the interest being paid in arrears, for the month prior to that in which the payment is sent. On the other hand, if payments can’t be made then problems generally follow suit.

From the perspective of an investment strategy, it is fine if you receive payment in arrears because payments are made periodically, and the money owed is simply held until that time. If, however, you have invested in a stock or bond which consistently is unable to pay promised dividends on time, you might want to consider other investment options. Since dividends are not guaranteed, and in any case, it would be odd that such a situation would arise.

Perhaps of greater concern would be a company which was consistently paying its bills late. Being in a constant state of arrears can significantly affect the value of a business, thereby affecting the value of its stock. Just as you would not expect a great deal of understanding if you paid your bills late most of the time, the same holds true in the world of high finance.

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