When a loan is repaid in regular fixed payments, this repayment usually includes both compounded interest and principal installments for the period. As each successive payment is made the interest portion gradually decreases and the principal portion increases. The QuickBooks Loan Manager creates an Amortization schedule for the duration of the loan, showing how much of each payment is applied to principal, interest and escrow (additional fees related to the loan). It also allows you to make payments for either the regular scheduled amount, or additional payments, and to run "what-if" scenarios to compare different loan choices.
Prepare to track loans in Loan Manager
Before using QuickBooks Loan Manager, set up the following accounts and vendor in QuickBooks Desktop.
- Create a vendor for the Bank or Financial Institution issuing the loan, if none already exist
- Record the initial loan amount as an opening balance (using New Account window) or as a transaction like journal entry. Make sure to use the loan origination date. If payments have already been made against the loan, you need to enter these as checks, bills or journal entries.
- Set up an Expense type account for interest payments and Fees and charges, if none already exist.
- Create an Escrow account if necessary.
What is Escrow?
Escrow is a specific portion of a loan that is held in an account by a third-party until the conditions of the loan are met. An Escrow Account is a QuickBooks Asset Account that tracks the escrow portion of a loan payment. Escrow accounts are commonly used to pay taxes and insurance.
To setup an Escrow Account:
- From the Lists menu, select Chart of Accounts.
- Click Account and select New.
- Select Other Account Type, choose Other Current Asset and click Continue.
- Enter the name of the account in the Account Name field.
- (Optional) In the Description field, enter a brief note or explanation about the account.
- Click Save & Close.
How to track loans and repayments using QuickBooks Loan Manager
- From the Banking menu, click Loan Manager.
- Click Add Loan.
- Enter Account Information of the loan and click Next.
- Account Name: Loan Account that you previously set up.
- Lender: Vendor to which payments will be made.
- Origination Date: Date from which the loan originates.
- Original Amount: Full initial amount of the loan.
Term: Time it will take to repay the loan in full in weeks, months or years.
- Enter the payment information of the loan and click Next.
- Select the Due Date of Next Payment.
- Payment Amount: Amount that will be paid each period.
- Next Payment Number: Only applicable if previous payments have already been made.
- Escrow Payment Amount: Escrow amount.
- Escrow Payment Account: Escrow account.
- (Optional) select Alert me 10 days before a payment is due.
- Enter interest information of the loan and click Finish
- Interest Rate: Enter the interest rate of the loan. For a 5% interest rate, enter “5”(no quotes), rather than “5%” or “0.05”.
- Compounding period Based on what is specified on your loan documentation.
- Payment Account: Bank account that you will use to pay the loan.
- Interest Expense Account: Expense account that will track the interest.
Fees/Charges Expense Account: Expense account that will track fees/charges of your loan.
- Review the loan information. Click Edit Loan Details if necessary. The loan details you entered show on the Summary tab at the bottom of the Loan Manager.
What if scenarios tool
You can use the What if scenarios tool to view the effects of other payment amounts, repayment period etc.
- Click the What If Scenarios button at the bottom of the Loan manager screen.
- From the Choose a Scenario drop-down, select either How much will I pay with a new loan? or Evaluate two new loans.
- From the Choose a loan drop-down pick a loan to work with.
- Enter the loan criteria and click Calculate to view the results.
- Click Print to print out the results.
- Click OK to close out when you are done.