How to Define an Interest Expense

An interest expense is defined as the amount an individual, business or organization pays for interest on a loan. It is called an expense because it is the cost of borrowing money. The interest is just another bill like paying rent.

Difficulty:

Moderately Easy

Instructions

1. Calculate what you are paying or considering paying in interest on a loan. Now break that down to what you would pay per month or year or whatever period of time you would like. This is your interest expense. You may need your lender to help you calculate this number. The amount of interest on a loan changes over time so your interest expense will be different in different months and years. Your lender will know how to figure this out.

2. Realize that some or all of your interest expense could be tax deductible. The most common deduction is home mortgage interest on a qualified residence.

3. Understand that points paid to secure a qualified loan are also a deductible interest expense. If you have a prepayment penalty for paying off a loan early, that too is a tax deductible interest expense.

4. Figure out what you can afford in interest expense. The home mortgage crisis of 2008 occurred largely because a great many borrowers did not consider their interest expense. The amount of interest you will pay to borrow money is another bill you will have to pay every month.

5. Think of your interest expense the same way as you would equipment rental or rent. Once you borrow money your interest expense will be a fixed expense.

Resources

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• Define Capital Expenditure
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