Blended payments: interest on the opening balance, the rest to principal

Build a blended-payment loan schedule, and read the current and long-term portions off it.

A blended payment

Most bank loans are not repaid in equal slices of principal. They are repaid in equal blended payments — the same dollar amount every year — each of which is part interest and part principal. Because interest is charged on what is still owed, the early payments are mostly interest and the late ones mostly principal. The paper gives you the payment; the work is the schedule.

Worked example — Northlake's five-year loan

Suppose the bank had offered the 100,000 groomer loan at 6 % over five years, repaid by five equal annual payments of 23,739.64. Two rules build every line:

$Interest = Opening balance \times 6% Principal repaid = Payment - Interest$

Year 1. Opening balance 100,000. Interest $100, 000 \times 6% = 6, 000$ . Principal $23, 739.64 - 6, 000 = 17, 739.64$ . Closing balance $100, 000 - 17, 739.64 = 82, 260.36$ .

Year 2. Opening balance 82,260.36 — not 100,000. Interest $82, 260.36 \times 6% = 4, 935.62$ . Principal $23, 739.64 - 4, 935.62 = 18, 804.02$ . Closing balance $63, 456.34$ .

Year  Opening      Payment     Interest   Principal    Closing
  1   100,000.00   23,739.64   6,000.00   17,739.64    82,260.36
  2    82,260.36   23,739.64   4,935.62   18,804.02    63,456.34
  3    63,456.34   23,739.64   3,807.38   19,932.26    43,524.08
  4    43,524.08   23,739.64   2,611.44   21,128.20    22,395.88
  5    22,395.88   23,739.63   1,343.75   22,395.88         0.00

The same payment every year; interest falling from 6,000 to 1,343.75; principal rising to meet it. The last payment is a cent short because every line was rounded to the cent — a real bank does the same.

Reading the balance sheet off the schedule

At the end of year 1 the loan balance is 82,260.36. What is current? The principal that will be repaid in year 2 — the schedule's year-2 principal column, 18,804.02. The rest, $82, 260.36 - 18, 804.02 = 63, 456.34$ , is long-term — which is the year-2 closing balance, as it must be.

At end of year 1	Amount
Current portion of bank loan	18,804.02
Bank loan payable, long-term	63,456.34
Total	82,260.36

The two errors this family collects: taking the year-1 principal (17,739.64) as the current portion — that has already been paid; and calling the whole payment (23,739.64) current — the interest in it is not a liability yet.

Why the split is not 50/50

A student who divides each payment in half gets year-1 interest of 11,869.82 — nearly double the true 6,000 — and an expense that is flat across the five years. Interest is the cost of borrowing, and the amount borrowed falls every year; a schedule whose interest does not fall has been built wrong. In Excel: =IPMT(6%,1,5,-100000) gives year 1's interest and =PPMT(6%,1,5,-100000) its principal; =PMT(6%,5,-100000) is where the 23,739.64 came from, and the paper will hand it to you.

Same payment each year; interest on the opening balance; the remainder reduces principal. The year-2 principal is the current portion at the end of year 1.