Overnight money is a term used to describe funds that are lent or borrowed for no more than one business day. This type of borrowed and lent funds is typically arranged on the interbank market and are paid in full by noon of the following business day. The activity is usually timed to coincide with the time of day when interest rates are at their lowest point, allowing the borrower to receive the extremely short-term loan at the best rates possible.
It is important to keep in mind that overnight money is different from a similar arrangement known as weekend money. With the former, the settlement of the loan takes place within 24 hours. By contrast, a weekend money loan may be initiated on a Friday and not settled until the following Monday. Unlike the overnight money loan that accrues a single day’s interest, the weekend money loan accrues a total of three days worth of interest, with both the principal and the interest considered due on the third day.
The rules governing the interbank market in which the overnight money loan is conducted will impact exactly what time of day the loan must be repaid to avoid incurring late charges. For example, a borrower may choose to initiate the loan request in the afternoon of a Tuesday, while interest rates are at a low point. As part of the arrangement, the terms may call for the loan to be repaid in full no later than noon on Wednesday. Once the loan is repaid, the borrower can initiate a new loan request later in the day, essentially a segmented day-to-day money pattern for as long as the strategy is practical.
Overnight money provides the benefit of allowing financial institutions to borrow funds for short periods to manage debt obligations that are due on a specific date. As a result, the institutions are able to avoid incurring additional fees and penalties that are often associated with late payments. Typically, the interest that is paid on the overnight loan is considerably less than the institution would incur in charges if the loan was not sought and acquired. As long as it is possible to retire the debt within 24 hours, the institution enjoys the advantages afforded by the arrangement; should something happen and the loan rolls into another business day, the increased interest fees and charges may offset any benefits gained from the original loan arrangement.
