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?
- How is Interest applied to the account?
- What if YNAB’s Interest Charge doesn’t match your lender’s interest?
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.
The calculated monthly Interest Charge is displayed in the Loan account Activity window.
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.
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 will only add interest to the Loan account when you make a payment; if interest is accruing without payments, we recommend using the Update Balance button to adjust the account balance to include the accrued interest.
YNAB assumes the Interest Charge (and escrow/fees, if applicable) for the loan must be covered first. The entire monthly Interest Charge will be applied to the first payment you record each month. Any payment funds beyond the interest (and escrow/fees, if applicable) are applied directly to the principal balance automatically.
What if YNAB’s Interest Charge doesn’t match your lender’s interest?
Depending on how your lender rounds interest, how often your lender compounds interest, when the lender applies interest to your loan, and more, the Interest Charge in YNAB may not exactly match the interest you owe in real life. However, there is good news—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. Additionally, since the Loan accounts do not affect the Budget, you can update the balance regularly without changing anything in your Budget.
YNAB’s Interest Charges cannot be edited. If the estimated Interest Charge is incorrect, work through the troubleshooting steps below, and then make a balance adjustment if necessary:
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.
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. We recommend using the Update Balance button to adjust the Loan account’s balance when there is a rounding difference.
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 use the Update Balance button to adjust the account balance, if necessary!
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 compare the total interest you paid the lender to YNAB’s monthly Interest Charge. The two should be pretty close, and you can use the Update Balance button to adjust the account balance, if necessary!
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 using only the balance of the Loan. For an offset mortgage, the Interest Charge and payoff data will be incorrect in the YNAB Loan account. We recommend setting up offset mortgage accounts as Tracking accounts instead of Loan accounts.