Calculate Udhar Interest
How udhar interest works for shopkeepers
Many Indian shopkeepers extend credit (udhar) to regular customers - it is a fundamental part of how business works in India. When customers delay payment beyond the agreed period, some shopkeepers charge interest on the outstanding amount as an incentive for timely payment and to cover the cost of capital.
The most common practice is simple interest at 1-2% per month (12-24% per year). This is straightforward to calculate and easy to explain to customers. Compound interest is less common in informal credit but may apply when amounts are large and durations are long.
The key to charging interest fairly is transparency: tell the customer the rate before extending credit, record it in your ledger, and generate a clear statement when collecting. Hisab Expert's Ledger feature tracks outstanding balances per customer - add the interest amount as a separate line item to keep your records clean.
Frequently Asked Questions
Can shopkeepers charge interest on udhar?
Yes, shopkeepers can charge interest on outstanding credit if both parties agree to the terms beforehand. It is advisable to communicate the interest rate clearly when extending credit. Many wholesale businesses charge 1-2% per month on outstanding balances beyond the agreed payment period.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original amount (principal). If someone owes you ₹10,000 at 12% per year, the interest is ₹1,200 per year regardless of how long it has been. Compound interest charges interest on accumulated interest too - so the amount grows faster over time. Most informal credit uses simple interest.
What interest rate do shopkeepers typically charge?
Most Indian shopkeepers who charge interest on udhar use rates between 12% and 24% per year (1-2% per month). This varies by industry, region, and relationship. The rate should be agreed upon before extending credit and documented in the ledger.
Is there a legal limit on interest rates in India?
India does not have a universal cap on interest rates for informal commercial credit between businesses. However, charging excessively high rates could be challenged under usury provisions in some states. The key is documentation and mutual agreement. For regulated lending, RBI guidelines apply.
Track every rupee of udhar automatically
Hisab Expert's Ledger tracks customer credit, sends WhatsApp reminders, and generates statements. No credit card required.