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What is an Interest Expense?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 27 September 2016
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    Conjecture Corporation
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Interest expense is a cost associated with borrowing money. It must be reported on income statements and balance sheets, and there are certain types of interest expense which may be tax deductible. The interest expense includes interest paid on a debt in a given accounting period, and it can also include points paid to secure a loan at a lower interest rate along with prepayment penalties for loans which are repaid early. Lenders usually provide people with interest statements which they can use to determine the amount of their interest expense in a given period.

When a loan is issued, the lender charges interest on the loan until it is repaid. The interest could be viewed as the cost of getting the loan; lenders don't hand out money for free. This means that the interest paid can be counted as an expense just like any other bill. For businesses, interest can be deductible because it is a large part of the costs of doing business just like other overhead costs, if it can be demonstrated that the loan was necessary for the business.

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For individuals, accounting for interest expense can be an important part of putting together monthly budgets. At tax time, people can also deduct certain types of interest paid from their taxes. This usually includes interest on student loans as well as interest on a mortgage. However, personal interest such as interest on a car loan or interest on a credit card cannot be deducted. The exception to this would be if the car or credit card was necessary for business purposes; if someone is using a credit card for office expenses, the interest may be deductible.

Companies state interest expense on their balance sheets, and publicly traded companies must make this information available for inspection so that potential investors can familiarize themselves with the financial situation of the company. High interest expense can be a cause for concern because it may suggest that the company could have trouble servicing its debt.

Interest expense should be contrasted with interest income, which is another thing which must be reported. Interest income is the income from any investments. A statement indicating how much interest was earned is usually sent out so that people can record their interest income accurately. For personal taxpayers, it is important to be aware that all interest income must usually be reported, although it is not necessarily all taxable because some types of investments are tax-exempt.

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Sinbad
Post 2

I was so confused when a financially savvy friend tried to explain to me that there are "good" interest expenses and "bad" interest expenses.

But it made much more sense to me when I realized that it wasn't there are any good interest expenses but rather better interest expenses than others.

For example, just as the article mentioned some interest expenses can be tax deductible so you end up not paying for some of the interest which is nice. The interests on mortgages and student loans are the types of loans that I know of that have this type of pro to them.

And of course, credit card interest is bad! It has no pro to it.

But the article added one good interest expense to my financial knowledge - the investment interest expense - if I read this right this is the interest money that goes to you from your investments.

So if I had a ton of money in an account that received interest such as a mutual fund or stock account then that is money I make on top of the money I have in the account - I like that idea (thought I am sure it is not that simple).

amysamp
Post 1

I was completely surprised to find out that one of my family members had creditors calling her house. Sadly she did not understand interest expense at all on top of not being in great financial shape and needing to rely on credit cards for a time.

When I explained to her about the *high* interest expense of most credit cards she thought they were the biggest rip off!

I explained that the interest expense is what makes credit cards successful, and why they are so readily available to what seems like everyone!

What ended up happening with my family member was that the interest expense plus the unpaid balances plus the fees she was being fined made her credit card debt skyrocket and snowball.

I think rather soon they will have to declare bankruptcy to get back on their feet.

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