Why Day Count Conventions Matter

Two loans can carry the identical interest rate and still charge different amounts of interest, purely because of how the days are counted. A day count convention is the rule that translates an annual interest rate into a daily accrual — and the choice of convention can move the effective cost of a loan by several basis points a year without anyone touching the quoted rate.

For floating-rate loans referencing SOFR, SONIA, or €STR, the day count convention is baked into the loan documentation and rarely gets a second look. But it's one of the few mechanical details that changes the actual dollars (or pounds, or euros) paid, so it's worth understanding.

The Three Conventions

Actual/360

Interest accrues on the actual number of calendar days in the period, divided by an assumed 360-day year. This is the standard convention in US dollar money markets and is used for SOFR-based loans.

Formula: Interest = Principal × Rate × (Actual days / 360)

Because the denominator (360) is smaller than the true length of a year, Actual/360 produces slightly more interest than a convention that divides by 365 — for the same quoted rate. Over a full calendar year, Actual/360 effectively adds about 1.39% to the true annualized cost relative to Actual/365 (365/360 ≈ 1.0139).

Actual/365

Interest accrues on the actual number of calendar days, divided by a 365-day year. This convention is common in consumer lending and is the market standard for SONIA-based GBP loans.

Formula: Interest = Principal × Rate × (Actual days / 365)

For the same nominal rate, Actual/365 produces slightly less interest than Actual/360, since the daily accrual factor is smaller.

30/360

Each month is treated as having exactly 30 days, and the year is treated as 360 days, regardless of the actual calendar. This convention is common in bond markets and some fixed-rate commercial mortgages, but it is rarely used for SOFR, SONIA, or €STR reference-rate loans, since those markets price off real overnight transactions and prefer actual-day accrual.

Formula: Interest = Principal × Rate × (30-day-adjusted days / 360)

Which Convention Applies to Which Rate

Reference Rate	Currency	Standard Day Count	Basis
SOFR	USD	Actual/360	360
SONIA	GBP	Actual/365	365
€STR	EUR	Actual/360	360
Legacy USD LIBOR	USD	Actual/360	360
Legacy GBP LIBOR	GBP	Actual/365	365

These conventions carried over from the legacy LIBOR markets: USD and EUR money markets have historically used a 360-day basis, while GBP markets have used 365. The Alternative Reference Rates Committee (ARRC) recommends Actual/360 as the standard convention for SOFR-based syndicated loans, consistent with prior USD LIBOR practice, though loan documentation can specify a different basis if the parties agree.

Worked Example: Same Rate, Different Cost

Consider a USD 10,000,000 loan accruing interest over a 92-day quarterly period at an all-in rate of 6.00%.

Actual/360: Interest = 10,000,000 × 6.00% × (92 / 360) = USD 153,333.33

Actual/365 (for comparison, same nominal rate): Interest = 10,000,000 × 6.00% × (92 / 365) = USD 151,232.88

The difference — about USD 2,100 on a single quarterly period for a $10 million loan — comes entirely from the denominator, not from any change in the quoted rate. Scaled across a full year and a larger facility, this gap becomes material, which is why the day count convention is negotiated and fixed in the credit agreement rather than left ambiguous.

Day Count Conventions and Compounding

For loans using Compounded SOFR in Arrears or the equivalent SONIA/€STR methodology, the day count convention determines both:

The weight (dᵢ) applied to each day's rate in the daily compounding factor (1 for most weekdays, 3 for Friday to cover the weekend, adjusted for holidays)
The annualization denominator used to convert the compounded factor back into an effective period rate

Because SOFR and €STR use a 360-day basis while SONIA uses 365, the compounding formula for a SONIA loan divides by 365 in the annualization step where a SOFR loan would divide by 360 — even though the day-by-day compounding logic is otherwise identical.

A Common Point of Confusion

Borrowers sometimes assume that switching from a 360-day basis to a 365-day basis is a cosmetic change. It isn't. Holding the quoted annual rate constant, moving from Actual/365 to Actual/360 increases the dollar interest paid by a factor of 365/360 — roughly 1.4% more interest for the same stated rate. Loan documentation should always be read carefully to confirm which basis applies, particularly when comparing quotes across lenders or across currencies.

Key Takeaways

Actual/360 and Actual/365 differ only in the denominator, but that difference has a real dollar impact over the life of a loan.
SOFR and €STR loans conventionally use Actual/360; SONIA loans conventionally use Actual/365.
30/360 is largely absent from modern risk-free rate loan markets, though it persists in some bond and fixed-rate mortgage contexts.
The day count convention is a negotiated term in the credit agreement, not an automatic consequence of the reference rate.
Always confirm the specified basis before comparing interest costs across loans or currencies.

Calculate It Yourself

Rather than trying to reconcile day count conventions by hand, use our free RFR Loan Calculator to model SOFR, SONIA, or €STR loans with the correct basis applied automatically — complete with a full daily rate ledger and Excel export.