Calculating the interest part of a loan?

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Kanatkins
Kanatkins Registered Posts: 11 New contributor 🐸
Hello

Have been stuggling with calculating what part of a business loan to but to interest as expenses - can anyone help.

Is the a formula to use?

Thanks

Comments

  • T.C.
    T.C. Registered, Tutor Posts: 1,448 Beyond epic contributor 🧙‍♂️
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    Ideally you need the original loan document, which will give all the details you need, including the interest rate and the amount of interest.
  • Wrenchie
    Wrenchie Registered Posts: 33 Regular contributor ⭐
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    It depends on what sort of loan it is.

    Some banks provide monthly/yearly statements with the interest shown as payments. These are quite straightforward.

    Others just have the original loan document with the interest rate, monthly payments etc. These are a bit more difficult. The interest is applied to the outstanding loan. I usually set up a spreadsheet showing the outstanding loan each month, the amount of the repayment, the amount of interest applied and the loan outstanding at the end of the month.

    It is a bit fiddly so I'm hoping someone will reply with an easier answer for us both!
  • burg
    burg Registered, Moderator Posts: 1,441 mod
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    Depends on the type of loan. If it is a variable rate loan then there should be a statement. If it is a fixed rate loan then I do the following:-

    Using the loan agreement take the total amount of interest payable. (this can be calculated by taking the payment amount x the number of payments less the original loan amount)
    Assume the interest accrues evenly.
    Then if three payments are made in the year and there are a total of 60 payments to be made the interest for that year will be 3/60 of the interest.

    I then use a control account to calculate the amount outstanding at the year end and reconcile this to the outstanding payments and remaining interest to be accrued which should come back to nil.
    Regards,

    Burg
  • Kanatkins
    Kanatkins Registered Posts: 11 New contributor 🐸
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    Thankyou -doesn't seem to be an easier option then!

    Is it common practice to assume the interest accrues evenly, I would presume the interest reduced year on year?

    Best Regards
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    Kanatkins wrote: »
    Is it common practice to assume the interest accrues evenly, I would presume the interest reduced year on year?

    I agree with Ian, that's what I've always done if I have nothing else to go by. Same for HP.
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    Google 'sum of the digits'.

    That is the most common method of weighting the interest over the period of the loan.
  • Jon1
    Jon1 Registered Posts: 11 New contributor 🐸
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    Is sum of digits not a GAAP/FRS requirement?

    Anyway, sum of digits calc reflects the true nature of the loan i.e more interest is paid at the start of the loan, because more capital is outstanding.
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    Sum of the digits is one of a number of acceptable methods and, yes, the interest is weighted towards the beginning.
  • Kanatkins
    Kanatkins Registered Posts: 11 New contributor 🐸
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    checked it out on HMRC
    http://www.hmrc.gov.uk/manuals/ctmanual/ctm53220.htm

    sum of digits much easier than spreadsheet I was using -Wrenchie you should have a look at this, might save you some time too!
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