TLDR: A loan instalment is not one expense. It is a repayment of principal, which only moves money from the bank account to the debt, plus an interest charge, which is the real cost. Track it as two lines and the purchase stops being counted twice.
The line on the statement says LOAN INSTALMENT, AED 1,422.90, on the 28th of every month. Every tracker I tried before building my own filed that line as an expense. Which felt right, because the money left. And it was also wrong, because the thing the loan bought had already been logged as an expense the month it was bought. By the end of the term the tracker had recorded the purchase once and the loan a second time, and the interest, which is the only part that was ever really a cost, was buried inside both.
This is the most common error I see in a personal budget, and it is the one that businesses fixed centuries ago.
Why counting the instalment as an expense makes a year look worse than it was
Take a plain example. An AED 60,000 personal loan over 48 months, which is the maximum repayment period the Central Bank allows for a personal loan under Regulation 29/2011, at 6.5% a year on a reducing balance. The same regulation, in Article (6), requires the rate to be declared on the reducing balance, so this is the honest way to quote it.
The instalment works out at AED 1,422.90. Over 48 months that is AED 68,299 handed to the bank, of which AED 8,299 is interest and AED 60,000 is the money that was borrowed in the first place.
Now look at what a tracker does if the loan paid for something logged in month one. Say the AED 60,000 covered a wedding, or a move, or a car deposit plus furniture. Month one records AED 60,000 of spending. Months one to forty-eight record another AED 68,299 of “loan expense”. The tracker’s lifetime total is AED 128,299 for a purchase that cost AED 68,299 including every dirham of interest.
The reverse error is just as common. Log only the instalments and the tracker thinks the wedding never happened, then quietly spreads it over four years as a vague “loan” category nobody questions.
A loan does not create spending. Spending creates the loan. The instalment is how the bill for that spending gets paid, plus a rental charge for the bank’s money.
How a company books a loan repayment, and why it is the right model for a household
At the trading company where I work, a loan repayment never touches the expense side of the books in one piece. When the bank debits the instalment, two entries happen. The principal portion reduces the loan liability. The interest portion goes to finance cost. The asset the loan bought sits on its own line from the day it was bought, and nobody counts it again.
The result is that the books can answer three separate questions at any moment. What do we owe? What did borrowing cost us this month? What did we actually buy? A tracker that files the whole instalment as an expense can answer none of them cleanly.
The household version needs three lines, not a finance degree:
| What happened | How to record it |
|---|---|
| The purchase, in the month it happened | Expense (or asset, for a car), full price, funded partly by the loan |
| The principal portion of each instalment | Transfer from the bank account to the loan, reducing the balance |
| The interest portion of each instalment | Expense, category “loan interest” or “finance cost” |
The bank account still goes down by AED 1,422.90. The debt goes down by less than that. The gap between the two is the interest, and it is the only number that belongs in a monthly spending total.
How much of each instalment is interest, month by month
This is where the reducing balance matters. Interest is charged on what is still owed, so it shrinks every month and the principal portion grows to fill the same fixed instalment.
On the AED 60,000 loan at 6.5% reducing:
| Month | Interest | Principal | Balance after |
|---|---|---|---|
| 1 | 325.00 | 1,097.90 | 58,902.10 |
| 12 | 257.78 | 1,165.11 | 46,425.56 |
| 24 | 179.75 | 1,243.14 | 31,942.02 |
| 36 | 96.50 | 1,326.40 | 16,488.48 |
| 48 | 7.67 | 1,415.23 | 0.00 |
In year one the interest adds up to AED 3,500 of the AED 17,075 paid. In year four it is AED 586. Same instalment, very different cost. A tracker that logs AED 1,422.90 as expense every month shows a flat cost that does not exist; the true cost of the loan falls from AED 325 a month to under AED 8.
Two practical ways to get the split without building a spreadsheet:
- Use the schedule. Banks issue a repayment schedule at signing, and the interest and principal columns are on it. Enter the year’s interest total once and divide by twelve if precision to the dirham is not needed.
- Use the balance. Debt balance last month, minus debt balance this month, is the principal repaid. Instalment minus principal repaid is the interest. The loan balance is on the bank app and on the AECB report.
One caution on car loans. Article (3) of the same regulation caps a car loan at 80% of the vehicle’s value over a maximum of 60 months, and most are quoted at a flat rate rather than a reducing one. A flat rate front-loads the interest, so the schedule from the bank, not a reducing-balance formula, is the only reliable source for the split. I covered the early-settlement side of that in a separate piece on car loan early settlement.
What the split changes in the monthly numbers
Regulation 29/2011 also says, in Article (7), that total instalments must stay within 50% of gross salary and regular income. On a salary of AED 8,000 this instalment is about 17.8% of gross, comfortably inside the cap. But that cap is about cash flow, not cost. The cost of the loan to that household is AED 325 in the first month and AED 8 in the last, and it is that figure, not the AED 1,422.90, that competes with groceries and petrol in a spending review.
Once the split is in place, three things become visible that were hidden before:
- The real spending total. Month one shows the purchase. Later months show only interest. The household’s annual spending stops being inflated by AED 13,574 of principal repayment that was never spending.
- The debt trajectory. The loan line falls by a known amount every month, which is what makes a payoff date a calculation instead of a hope.
- The finance-cost line. Interest across every loan and card, in one category, is the number that says whether debt is cheap or expensive for this household this year. Everything else is timing.
I keep each loan in Masrofna as a debt with its real balance, and the app splits each instalment into principal and interest so the spending view only ever sees the interest. The method works in a spreadsheet just as well. What matters is the rule: principal is a transfer, interest is an expense, and the purchase was counted the day it was made.
The statement line will keep saying LOAN INSTALMENT, AED 1,422.90. Read it as two numbers, and the year finally adds up.