Thought Leadership

Leap Year 2024: How Does It Impact a Loan Calculator?


In what seems like the blink of an eye, four years have passed and another Leap Year is upon us. One extra day to make up for the fact that it actually takes a little longer than 365 days for the Earth to orbit the Sun. In honor of both Groundhog’s Day and the mysterious Leap Day, we thought it would be worthwhile to recycle one of our “oldie but goodie” articles on the complications Leap Day poses on consumer loan calculations. 

While most people consider February 29th to be a “free” day we get every four years, compliance officials and loan calculation software providers know that it can actually be more troublesome than most people would even realize. In the consumer lending industry, the various effects of Leap Day on loan origination, loan servicing systems, and the compliant implementation of proper loan software parameters are quietly downplayed. That shouldn't be the case! As we at Carleton have stated before: simple interest quickly becomes quite complicated. For starters, during a Leap Year:


Top 3 Questions For The Consumer Lending Industry to Consider During a Leap Year


Question #1: Does interest accrue on the balance at 1/366 of the annual interest rate? Or 1/365? 

Is it 'fair' for the creditor to get a lesser charge all year long when Leap Day only occurs in February? An illustration: a consumer loan or retail installment sales contract originated in December of a Leap Year involving simple interest at 1/366 daily rate will always receive less charge for that month than any identical transaction originated the following three years on the exact same date and time. That does not seem fair or just. 


Question #2: Does a finance company or lender's servicing system collect the actual interest agreed to by contract?

If a 1/365 annual interest rate is used to calculate daily charge, does the creditor intend to collect interest on February 29th or not? If the consumer lending organization does charge interest on Leap Day, does that align with their contractual disclosures? Frankly, these are questions that may even be too advanced—do all servicing systems even have the capability of accounting for Leap Day? 


Question #3: If a payment is received and posted on Leap Day, is it recognized as 2/29/24? 

For banks and institutions that ignore Leap Year altogether and have coded their loan origination and loan servicing software systems to do the same, what actually happens when a payment occurs on Leap Day? Seems like it would make posting a payment on February 29th very problematic. This may seem extreme, but should that bank even be OPEN on February 29th?


While this may seem like it's all simply an academic exercise, for many lenders Leap Year does indeed impact the nuts and bolts of calculating principal and interest. It is also critical that Leap Year is properly accounted for between front- and back-end systems to ensure compliance with state and federal regulations. Contact us today for an evaluation and learn how Carleton can handle your loan calculation needs.