Interest in Loan Accounts

Interest is the cost of debt. You borrow one amount and pay back more thanks to interest. Each time you make a loan payment, the lender takes some of your money as payment to themselves (interest), and applies the rest of the funds to the outstanding balance of the loan. YNAB Loan accounts do the same, showing how much of your payment is applied to interest vs. the principal of your loan, right there in your budget!

YNAB Loan accounts can be used as a planning tool and they help show how much each loan costs in terms of interest and time. We designed the Loan accounts around a standard amortization calculation, where interest is compounded monthly and each monthly payment is split and applied to interest and principal. Over time, the proportion of your payment that goes to interest decreases, and more of each monthly payment is applied to the principal balance of the loan, until it is paid in full.

Here’s a closer look at how interest is calculated and applied in Loan accounts, and what to do if YNAB's Interest Charges do not match your lender’s.

In This Article

How does YNAB calculate the monthly Interest Charge?

YNAB compounds interest monthly (regardless of the type of loan) by taking the interest rate, dividing by 12, and multiplying with the current balance. This is how the interest charge displayed in the Loan Account Activity window is calculated.

Interest in the First Month of a Loan Account

In the first month of your Loan account, the Interest Charge will be $0.00 because YNAB doesn’t know if a monthly payment has already been made that month. If you record a payment during the first month of a Loan account, YNAB will calculate and apply interest to the payment, and a non-zero Interest Charge will appear in the Activity window.

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How is Interest applied to the account?

The monthly interest charge is added to the Loan account when you make a payment. YNAB deducts the interest charge from your payment, then applies the remaining payment funds to the balance.

YNAB assumes the interest charge (and escrow/fees, if applicable) must be covered first, before any money goes toward principal. The entire monthly interest charge will be applied to the first payment you record each month. If you make weekly or biweekly payments, your first monthly payment may not impact the principal balance of the loan because YNAB will use those funds to cover the monthly interest charge. You can edit the interest charge to match the interest your lender charged for that first payment, or wait and update the interest charge at the end of the month to match the total amount of interest you paid that month.

YNAB will display the total amount of interest charged each month—it will not display individual interest charges. 

If interest is accruing without payments, YNAB won’t add that interest automatically. You will need to add accrued interest charges by clicking Add Activity>Add Interest.

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What if YNAB’s Interest Charge doesn’t match your lender’s interest?

As long as the account balance and interest rate in YNAB match the account balance and interest rate of your loan in real life, YNAB’s interest calculations will be pretty close over time. However, depending on how your lender rounds interest, how often your lender compounds interest, and when the lender applies interest to your loan, the interest charge in YNAB may not exactly match the interest you owe in real life. There is good news—you can edit the interest charges entered by YNAB. Additionally, since the Loan accounts do not affect the Budget, you can update the account balance without changing anything in your Budget.

You can edit the interest charge estimated by YNAB by hovering over “Interest Charges This Month” and clicking the pencil icon that appears. YNAB will give you a preview of what the new total of interest charged that month will be, then you can edit the amount and hit Save.

If the estimated interest charge is frequently incorrect, you can work through these troubleshooting steps to make those estimations as accurate as possible:

How to Troubleshoot the Interest Charge Amount

  1. Are the Account Details correct? The interest charge is calculated based on the balance you owe and the interest rate. If the interest charge is incorrect, check the Account Details by hovering over the account name and clicking the pencil icon when it appears. Make sure the interest rate and current balance are accurate, and adjust them if necessary.
  2. Is the difference between the Interest Charge in YNAB and the interest you paid in real life very small (less than $1)? If so, this is likely due to how YNAB rounds vs. how your lender rounds the interest calculations. You can change the interest charge amount when there is a rounding difference.
  3. Does your lender compound interest non-monthly? YNAB Loan accounts are designed around an amortization formula that compounds interest monthly. If your lender compounds interest daily, or quarterly, or on another schedule, the interest calculations in YNAB may be slightly different from your lender’s interest.

    We recommend using an Equivalent Interest Rate calculator to determine the equivalent monthly interest rate for your loan. Enter this rate in YNAB, then wait until the end of the month (or the end of the quarter) to compare your YNAB Loan account to the real-life loan. Waiting until the end of the month will help ensure you’re seeing the total interest your lender and YNAB have charged over that time period. The two should be pretty close, and you can edit the total amount of interest charged each month, if necessary!
  4. Do you make frequent (weekly, biweekly) payments? YNAB will apply the entire monthly interest charge to your first monthly payment. If you pay weekly or biweekly, your lender may charge interest on each payment. For these payment schedules, we recommend waiting until the end of the month to edit the total interest amount to match the amount you were actually charged for the whole month.
  5. Is this an offset mortgage? Offset mortgages calculate interest using the mortgage balance less the balance of a separate (offset) account. The YNAB Loan accounts calculate the monthly Interest Charge and loan payoff details using only the balance of the Loan and the interest rate. Because of this, Loan accounts aren’t a good fit or offset mortgages, and we recommend setting these up as Tracking accounts instead.

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