Do I have to send the borrower an annual statement?

For most private loans, no formal requirement, but it is best practice. An annual statement shows the principal balance at year-start, total payments received, interest paid, principal paid, and ending balance. It helps the borrower file taxes (if interest is deductible to them), and it reduces "I already paid that" arguments later.

Do I send a 1099-INT to the borrower?

Lenders are required to file Form 1099-INT with the IRS for any individual borrower who paid them $10 or more in interest during the year, but only in the course of trade or business. Pure family loans typically do not trigger 1099-INT filing because lending is not the lender's trade or business. Larger or more frequent private lending can shift you into business-loan territory; talk to a tax pro.

Is interest received on a private loan taxable to the lender?

Yes. Interest income is taxable on Schedule B of Form 1040 regardless of whether a 1099-INT was issued. The lender reports interest received in the year received (cash basis). The principal portion of payments is not income; only interest is.

Is interest paid by the borrower deductible?

For most personal-use loans (a friend lends you money for general purposes), no. Interest is deductible primarily on home mortgages (with a recorded mortgage on a qualified residence), business loans, and investment loans. A family loan that helps the borrower buy a home with a recorded mortgage can qualify the borrower for mortgage interest deduction; a typical unsecured personal loan does not.

How do I build a simple amortization schedule?

For each payment: calculate interest = (current principal balance) x (annual rate / 12) for a monthly loan. Subtract interest from payment to get principal portion. Subtract principal portion from current balance to get new balance. Repeat for each payment. Spreadsheets handle this in two formulas. Many free amortization calculators online do it for you.

What should a payment receipt include?

Date received, amount received, payment method (check number, transfer reference, cash receipt), the period the payment covers, principal portion, interest portion, late fee (if any), and the new outstanding balance. A simple email confirmation works for casual loans; a paper receipt for in-person cash payments.

What if the borrower pays extra (above the scheduled amount)?

The note should specify how to apply the extra: by default, most notes apply extra payments to principal. This shortens the loan term but keeps the regular payment schedule. Some notes allow the borrower to "skip ahead" by applying extra to future payments. Read the note; if it is silent, principal application is the standard.

Should I keep records even after the loan is paid off?

Yes, for at least 7 years. Tax records and proof-of-payoff are useful if the IRS asks about interest income, if the borrower disputes the loan history, or if the loan was secured (you may need to release the lien properly).

Recording Payments and Keeping a Payment Ledger

The promissory note creates the obligation. The payment ledger proves what has been paid. Two years into a loan, when the borrower says "I think we are almost done" and the lender says "we still have eight more payments," the ledger settles it. A spreadsheet, a one-page receipt template, and a short annual summary handle the entire job for almost any private loan.

What a payment ledger actually contains

For each payment received, record:

Date received
Amount received
Payment method (check number, transfer reference, cash receipt number)
Interest portion (calculated based on current outstanding balance)
Principal portion (remainder after interest)
Late fee, if applied
New outstanding principal balance after this payment
Cumulative principal and interest paid to date

A spreadsheet with one row per payment handles this for the entire life of the loan. Free templates exist; you can also use any amortization calculator output and update as payments come in.

How interest is calculated each payment

For a standard amortizing loan with monthly payments at a fixed annual rate:

Monthly interest rate = annual rate / 12
Interest portion of payment = current outstanding balance x monthly interest rate
Principal portion of payment = scheduled payment amount minus interest portion
New balance = old balance minus principal portion

Example: $10,000 loan at 6% annual rate, $200 monthly payment.

Month 1 interest: $10,000 x (0.06 / 12) = $50. Principal: $200 - $50 = $150. New balance: $9,850
Month 2 interest: $9,850 x 0.005 = $49.25. Principal: $200 - $49.25 = $150.75. New balance: $9,699.25
And so on, each month interest goes down and principal portion grows

Building an amortization schedule once, at signing

Before the first payment, build the entire schedule. You will know:

Total number of payments
Date of each payment
Scheduled interest and principal split for each payment
Total interest the borrower will pay over the life of the loan
Final payment amount (often slightly different from regular payments due to rounding)

Use our Loan Payoff Calculator to build the schedule. Print it, attach to the note, give the borrower a copy.

How to apply non-standard payments

Extra payment

Standard rule: applies to principal, reducing the outstanding balance ahead of schedule. The next interest calculation is on the lower balance, so future interest is reduced.

Partial payment

Apply per the note. Common rule: apply to interest first, then principal. If the partial payment does not cover the interest due, principal does not move and the unpaid interest may accrue or trigger a late fee.

Late payment with late fee

Apply the late fee first (separate from principal and interest), then interest, then principal. Track the late fee separately on the ledger.

Skip a payment

Default: skipped payment becomes overdue, late fee applies, interest continues to accrue. Some notes allow modifications by mutual agreement; document any agreed changes in writing.

The annual statement

At the end of each calendar year, send the borrower a summary:

Loan number / reference
Principal balance at January 1
Total payments received during the year
Total principal paid
Total interest paid
Late fees paid
Principal balance at December 31

The borrower may need this for their tax return (if interest is deductible) or simply for personal records. The lender benefits because the borrower has a written confirmation of where things stand.

Tax filing for the lender

Interest received is taxable income reported on Schedule B (Interest and Ordinary Dividends) of Form 1040. The lender:

Reports the total interest received during the year, even if no 1099 was issued
Records the loan principal as an asset (not income)
If the loan is bad and the lender takes a loss, that may be deductible as a non-business bad debt (short-term capital loss, with limits)
Should retain the note, ledger, and payment records for at least 7 years

Tax filing for the borrower

For most private loans, the interest is not deductible. Exceptions:

Mortgage interest: deductible if the loan is secured by a qualified residence and properly recorded as a mortgage. Family loan to buy a home, with a recorded mortgage, can qualify.
Investment interest: if the borrower used the loan to buy investment property, interest may be deductible up to investment income (Form 4952).
Business interest: if the borrower used the loan in a trade or business, interest is deductible (Schedule C, F, or business return).

1099-INT: when the lender must file

The lender must file Form 1099-INT and provide a copy to the borrower if:

The lender received $10 or more in interest from this borrower during the year, AND
The lender is in the trade or business of lending (not strictly a one-time family loan)

Pure family loans usually do not require 1099-INT. Recurring private lending (multiple loans to multiple borrowers, hard money lending) does. When in doubt, file the 1099-INT; the cost of filing is small and missing it can create IRS issues later.

What happens at payoff

Borrower makes the final payment.
Lender confirms in writing that the loan is paid in full.
If secured: lender executes a lien release (UCC-3 termination, satisfaction of mortgage, vehicle title release).
If the original note is held by the lender: marked "PAID IN FULL" with date and signature, returned to borrower.
Both parties retain copies of the marked-paid note and the final ledger.

Use our guide on paid-off notes for the full closeout process.

Tools

Loan Payoff Calculator for amortization
Usury Limit Checker for state caps
Statute of Limitations Lookup for collection deadlines

Get the note done right

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