Tracking a small unlinked loan to someone else
If you are interested in tracking a small or informal loan to someone else, for example, a friend or family member, then this is the guide for you.
This guide will look at an example of lending a friend $1000, covering how to record the amount owed to you as an asset, how to treat the repayments, and any interest earned.
Our recommended approach
We recommend tracking these funds in your PocketSmith using the Assets and Debts feature on our Net Worth report (Reports > Net Worth).
Debts and Assets in PocketSmith differ from bank accounts in that they do not contain transactions, and their balance is updated either manually via the calendar or automatically by budgets.
You can find more details here: Managing your assets and debts, but read on for the steps of tracking these loans!
Tracking a loan to someone else
Adding the loan as an asset
For this example, imagine you loaned a friend $1,000, and they were going to pay you back $100 per week. As you have loaned the money to someone else, this can be added as an Asset, reflecting the money owed to you.
- Head to the Net Worth (Reports > Net Worth) page
- Create an Asset called Loan to Friend with a current balance of $1000. See: Add an asset to Net Worth.
Tracking regular repayments with a transfer budget (no interest charged)
If the repayments are going to be regular, on a consistent schedule for the same amount each time, and you are not planning to charge your friend any interest, follow the steps below:
To track the initial loan transaction and your friends’ repayments towards the loan, create the following categories:
- Loan to friend - initial (transfer category) - the initial transaction being loaned to your friend will be assigned here
- Loan to friend - payments received (transfer category) - any repayments toward the loan are categorised here, and a transfer budget for this category will reduce the value of the asset as the loan is paid off
Step two: Create a transfer budget
Set up a transfer budget to match your friend's $100 weekly repayments. This transfer budget will automatically reduce the asset's balance as the loan is paid off.
This transfer budget would be an expense from the asset to the bank account that receives these payments, as you would be decreasing the Asset balance, not adding to it.
To learn how to create a transfer budget for an asset, see: Creating a transfer budget for an asset.
Tracking irregular repayments
If the repayments are going to be irregular, follow the steps below:
- Create a transfer category for the repayments e.g. Loan to friend - payments received
- Use the Calendar to manually update the value of the Asset each time your friend pays you or you loan more money.
Check out the steps for this here: Updating the value of the asset from the Calendar page.
On the Calendar, navigate to the date you want to show this change in value and change the balance on that exact date.
Categorising the transactions associated with a loan to someone else
Any transactions associated with a loan to someone else should be treated as transfers so that they don't appear as income or expenses as part of your day-to-day spending. However, it's best to separate the repayments from the initial loaned amount as this allows for the most accurate reporting.
- Assign the initial expense transaction(s), where the funds are being loaned out to your Loan to friend - initial transfer category
- Assign any income transactions repaying the loan to your Loan to friend - payments received category
Example
If you loan $1000 to your friend, you would:
- Treat any initial debit transactions, reflecting the loan, as a transfer, assigning them to your Loan to friend - initial transfer category
- Treat any repayments from your friend as a transfer, assigning them to your Loan to friend - payments received transfer category
Tracking regular repayments with a transfer budget (with interest)
If you are earning interest on the funds you’ve loaned to someone else, there are a couple of additional steps. First, create the categories and budgets outlined here, then create the following:
- Create an additional income category, e.g. Loan to friend - interest income, and assign any interest transactions associated with the loan to this category
- Create a budget for the interest, under ‘Which account’s forecast is this budget for?’, choose the account that will receive the interest payments.
As the way the interest is paid can vary, read on for examples of how you might budget and track any interest earned.
Example one
If the interest is paid with the regular weekly repayments, you can split the friend's repayments into two transactions: one for the principal and one for the interest. For example, if interest is charged at a flat rate of 10%, rather than $100 per week, the friend would pay back $110 per week. You can split the transaction into:
- $100 categorised to Loan to friend - payments received
- $10 categorised to Loan to friend - interest income
To learn how to split transactions, see: Splitting transactions
You can then create a budget reflecting the $10 weekly interest:
Example two
Alternatively, you can categorise all repayments up to the original loan amount to the Loan to friend - payments received transfer category. Then, any repayments after this can be categorised as Loan to friend - interest income.
For example, if the friend is repaying $100 per week, the first 10 repayments would be assigned to Loan to friend - payments received, and the final $100 repayment can be categorised under Loan to friend - interest income.
Create a one-off budget to reflect the final payment as interest income:
