interest income received by a bank, though not actually recognized as accrued, or earned income. Consumer INSTALLMENT LOANS where the finance charges are computed using the add-on interest method, and discount loans, with prepaid finance charges, are loaded in the early months with interest payments that the lender cannot count as income. If the borrower repays the loan early, part of the interest paid must be given back in a rebate. The early interest payments gradually are amortized over the life of the loan, and credited as interest income.
Also, fees paid by either of the parties to a swap agreement, are unearned interest, for example, an interest rate swap.
interest that has already been collected on a loan but that cannot yet be counted as book earnings. prepaid interest received falls into this category; prepaid interest is taxable when received by cash or accrual basis taxpayers.
interest that has already been collected on a loan by a financial institution, but that cannot yet be counted as part of earnings because the principal of the loan has not been outstanding long enough. Also called discount and unearned discount.
