I was approached by a client asking me why does your bank use 360 days instead of 365 days when calculating the interest payment of a loan.
I told him it's some sort of a convention, but he wasn't fully convinced.
I looked up Wikipedia, but it doesn't provide much detail.
Why 360 Days Instead of 365 Day?
The simple answer is that 360 days is used because of its simplicity.
User @whateverittakes, a private equity associate, shared the simple explanation:
Folks didn't have calculators back in the day. Much easier to use "round numbers," so "360 days in a year and 30 days in a month" became the convention of choice. It stuck.
There's actually many different ways. 360 days is used because it's far simpler. 30/360 is the best method in my opinion because of how you can divide up payment frequencies and because you don't have to count the actual number of days between dates.
You can learn more about this concept with the below video.
Read More About Interest Expense on WSO
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- Interview Question - PIK Interest Accounting
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