What is Annuity in Arrears?

An annuity in arrears is a series of payments that are due at the end of each successive time period. For example, the periodic payments on a mortgage are usually paid in arrears. Many payments on installment loans can be classified as an annuity in arrears. This type of payment schedule reduces the present value of the payments, since the payments are made later in time. Because of this present value issue, the value of an annuity in arrears will increase when interest rates decline, and fall when interest rate increase.

Annuity in Arrears vs. Annuity in Advance

The reverse of an annuity in arrears is an annuity in advance, where payments are due at the beginning of each period. An annuity in advance has a higher present value than an annuity in arrears, since the payments are made earlier in time.