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Capitalized Interest
Also called interest capitalization, rolled-up interest, accrued and capitalized interest.
Interest that is added to the loan balance instead of being paid when it accrues, so it becomes principal and starts earning interest of its own.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Interest accrues whether or not a payment is due. When a facility has a period with no payment — a construction draw phase, a deferral, an interest-only holiday that is not actually paid, a forbearance — the accrued amount has to go somewhere. Capitalization moves it into principal at a defined event, and the loan is then re-amortised over the remaining term on the larger balance.
Where it happens
- Construction and project loans. An interest reserve is built into the loan amount and interest is drawn against it, so you borrow the interest
- Deferred-payment and payment-holiday arrangements. Common in the first months of a term loan and in relief offered mid-term
- Forbearance and modification. Missed interest, and sometimes fees and escrow shortfalls, are rolled into the balance as a condition of the workout
- SBA and bridge structures. Interim periods before permanent financing takes out the bridge
How it differs from neighbouring terms
Where this one catches people
A payment holiday is presented as relief and delivered as a balance increase. Three months of no payments on a term loan does not pause the cost; it accrues the cost, adds it to what you owe, and charges you interest on it for the rest of the term. The monthly payment after the holiday is higher than before, or the term is longer, or both.
In a workout this compounds literally. If a first forbearance capitalises three months of interest and a second one capitalises three more, the second capitalisation includes interest charged on the first. Before accepting any deferral, ask for two figures in writing: the balance on the day payments resume, and the total of all remaining payments compared with the total under the original schedule. The difference between those two totals is the price of the relief.
Worked through
Illustrative only. A $200,000 term loan at 10 percent, with a 90-day payment deferral granted six months in.
Interest accruing over the deferral: $200,000 × 0.10 × 90 ÷ 365 = $4,931.51.
Capitalised, the balance becomes $204,931.51. In the twelve months after payments resume, the interest charged on the capitalised portion alone is $4,931.51 × 0.10 = $493.15 — interest on interest, for as long as the loan runs.
The three months of "no payments" therefore cost roughly $4,932 in accrued interest plus several hundred dollars of compounding, and the payment resumes at a higher figure because the same remaining term now has to amortise a larger balance.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Capitalized Interest — common questions
What does capitalized interest mean?
Interest that is added to the loan balance instead of being paid when it accrues, so it becomes principal and starts earning interest of its own.
Where does capitalized interest catch people out?
A payment holiday is presented as relief and delivered as a balance increase. Three months of no payments on a term loan does not pause the cost; it accrues the cost, adds it to what you owe, and charges you interest on it for the rest of the term. The monthly payment after the holiday is higher than before, or the term is longer, or both.
Is capitalized interest the same as an interest rate?
Capitalized Interest is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does capitalized interest apply to?
Term Loan, Business Line of Credit, SBA Loan, Equipment Financing.
Is there a worked example of capitalized interest?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside capitalized interest?
Add-on interest, Amortization, Deferred payment, Forbearance, Interest-only.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.