Average Daily Balance
FinancingThe average daily balance method is how interest is charged on a line of credit like a HELOC: the lender adds up the balance you owe on each day of the billing cycle, divides by the number of days, and charges interest on that average — not on a fixed, pre-set amortization schedule the way a traditional mortgage does. It is the mechanical reason velocity banking can save interest at all.
How it works. Because every single day counts, cash you park against the balance — even for a few days — lowers the average and therefore the interest. On a fixed mortgage your payment and interest are locked from day one no matter how the balance moves mid-month; on a daily-balance line, moving your money there works for you continuously.
The effect is real but modest per month, and it compounds only with discipline. A $400,000 balance at 7% accrues roughly $77 a day. Parking a $10,000 paycheck against it for 20 days of the month lowers that month’s interest by only about $38 — helpful, and it repeats every month, but nowhere near the “magic” some marketing implies. The bulk of any fast payoff still comes from actually paying the balance down.
Example. Two borrowers each owe $400,000 at 7%. One leaves $10,000 idle in checking all month; the other keeps it against a daily-balance HELOC and pays expenses from a credit card until month-end. The second borrower is charged interest on a lower average balance every day the cash sits there — a small monthly saving that adds up over years.
See the products that use this in HELOCs & portfolio loans and the first-lien HELOC.