Loan payment split ESTIMATE
The level monthly payment on a fixed rate, and how the first payment divides between interest and principal.
Result ESTIMATE
The payment is fixed. The split is not.
The monthly payment is principal × monthly rate × (1 + monthly rate)n ÷ ((1 + monthly rate)n − 1), where n is the number of months. On $10,000 at 6% for 5 years, the monthly rate is 0.5% and n is 60. The payment is $193.33. The first month’s interest is $50, so $143.33 reduces principal. Later months charge interest on a smaller balance, so the interest portion shrinks. A 0% rate is straight principal ÷ months.
In the books, the cash payment is not all interest expense. Debit interest expense for the interest portion, debit the loan liability for the principal portion, and credit cash for the payment. The balance sheet should still show the remaining principal. The year-end checklist asks you to match that balance to the lender statement. Fees, balloon payments, and extra principal payments are not in this formula.
Interest expense is not the tax deduction
Whether interest is deductible, and where it goes on a return, depends on how the money was used. This page does not apply the business-interest limitation. It only splits a level payment so the journal entry has two amounts instead of one. Confirm the current IRS instructions before you deduct the interest line.