Reporting Payments on Compound Interest Loans

This topic is kind of new to me, so I don't know the answers, but if the number of years of the loan is undefined, then shouldn't any interest payment be directed first towards reducing principal? If the number of years is known then the interest portion can be calculated through a formula.

The interest portion of the loan in the n'th month is I[n] = a - (L[n-1] - L[n]) where I[n] is the interest portion of the loan in the n'th month, a is the monthly payment, L[n-1] is the amount of the loan remaining in the n'th minus 1 month, L[n] is the amount of the loan remaining in the n'th month.

Through some math I've calculated a to be a = L * r / (1-(x^(-N))) where L is the loan amount, r is the interest rate like 0.06 for 6%, x=1+r, N is the total number of terms -- if compounded monthly for 30 years then N60.

And also I've calculated L[n] = L * x^N - a * (x^n-1)/r

It is not clear what you mean with #2. If you mean that the software tells you the breakdown, then that is a typical feature in many loan amortization calculators. Search for the term, and you will find many available free.

Let's say you have a $10K loan. After several years of non-payment on that loan, most software reports the "principal" on that loan as much more than $10K. In a compounding interest loan, the interest each period is added to the principal to get the new principal.

amount. Anything you receive back in excess of that is interest. I suspect the IRS looks at it a similar way.

But from the standpoint of most compounding interest software, "principal" means the original loan amount PLUS any unpaid interest. That's a much different meaning of "principal". And the only software for compounding loans I have seen to date provides amortization reports where you lose all sense of what amount of each payment pays off the original loan amount. The software reports payment of "principal" using the software's definition of principal, not the IRS or lender's definition of principal.

As a person or company making a loan, and intending to pay taxes on interest on that loan, you need a tool that lets you clearly distinguish what part of each payment paid off the original loan amount. That's what I am trying to find. It's fine if the software also reports against some alternate definitions of principal. But at minimum I need to understand for tax purposes how much of the loan payment is paying off the original loan amount. So far I cannot find software that does this.

nish

You'd first have to look to the terms of the loan to determine how payments should be allocated. Many loans call for timely and late payments to be applied first to accrued interest and fees before principal. The application of a series of timely payments would match a predetermined amortization schedule, but multiple late payments would limit the usefulness of that schedule. You probably won't find any freely available loan amortization software that will provide many "what if" scenarios for application of late payments. You might find something that computes accrued compound interest between payment dates, or you could write spreadsheet formulas to do the same. From there you'd have to apply the payment application rules spelled out in the loan contract to determine divisions between principal, interest and fees.

Why are you doing this?

Are you willing to start with several on-line mortgage calculators?

Good observationa! From that standpoint it should be easy for OP to determine that any payment that does not reduce principal below the original loan amount is all interest for tax purposes. When the loan amount does get back to the original principal amount, the standard amoritization table should be accurate.

Stu

Close: until the payment reduces the principal below the *low-water mark* on the loan, it's interest. (E.g. $100K original loan, paid timely until balance reached $80K, then not paid and interest pushed the balance up to $105K. Until payments reduce the balance to $80K, they're all interest.)

Seth

I think you are looking for something that will handle "negative amortization". This looks like a good start to create a calculator in a spreadsheet.