<p>If you make a payment of \$X, then:</p>

<ul>
<li>loan balance (bank asset) goes down by \$X, and</li>
<li>deposit balance (bank liability) goes down by \$X.</li>
</ul>

<p>I.e., the bank balance sheet shrinks (as do money aggregates that  include bank deposits).</p>

<p>The bank may have held a loan loss provision against the loan, and so the loan may have been carried on the balance sheet at less than \$X. For example, a bank might think there is an expected loss rate on this loan of 2%, so the bank would have a provision of .02*\$X. The loan would be carried on the balance sheet at a value of .98X, not X. The creation of this provision generates a loss, causing a corresponding reduction of equity. (Note: how this is accounted for probably depends on the jurisdiction.) Note that there are no transactions associated with this loss, so it is a non-cash loss.</p>

<p>Since you paid off the loan in full, the provisioned loss did not materialise, and so it would be reversed. The value of the loan would be written up to \$X before cancellation. This would generate a non-cash profit, as equity would rise by the amount of the reversal of the loss provision.</p>

<p>In the comments, it was asked how banks make money on loans. They make money off the interest payments, which are supposed to be higher than the interest costs of the bank. </p>

CC BY-SA 4.0
2020-04-30T13:04:23.400Z
"The bank MAY have held a loan loss provision". So how does the bank earn money if it did not hold it.
Cmac c
CC BY-SA 4.0
2020-04-30T13:05:56.440Z
"how this is accounted for probably depends on the jurisdiction". Can you explain how it is accounted in YOUR jurisdiction.(the one you understand).
Cmac c
CC BY-SA 4.0
2020-04-30T13:06:54.040Z
"the provisioned loss did not materialise, and so it would be reversed". What does "reversed" exactly mean?
Cmac c
CC BY-SA 4.0
2020-04-30T13:09:01.720Z
Iˇm trying to figure how do banks make money on loans. When I pay their capital increases because of the increase in their assets or because of decrease in their liabilities? Provided no central bank reserves get invlolved in all transactions.
Cmac c
CC BY-SA 4.0
2020-04-30T13:12:18.760Z
what is a "non-cash profit" in youre definition. Where does it appear on the banks balance sheet?
Cmac c
CC BY-SA 4.0
2020-04-30T13:17:49.853Z
That’s a lot of questions, How does a bank make money? The bank charges a greater rate of interest on its loans than it pays its liabilities. That is how they are supposed to make money. I’ll add some comments to the answer.
Brian Romanchuk
CC BY-SA 4.0
2020-04-30T14:40:38.687Z
That is a simplified explanation. I was wondering what actually goes on on the balance sheet. So far what I understood from other sources is that bank makes an "Interest receivable" entry in his assets along with a "loan receiveable". When the borrower pays those entries and the liabilities to the borrower get canceled. In the end the banks capital increases because of the decrease in his liabilities and not because he aquired an asset like everybody else says.
Cmac c
CC BY-SA 4.0
2020-04-30T15:40:37.943Z
Well, since there’s no assets to acquire, anyone saying that is obviously wrong. The creation of an interest receivable is the same thing as saying the bank is earning interest on the loan.
Brian Romanchuk
CC BY-SA 4.0
2020-04-30T15:55:30.677Z
Yes but it is still confusing because when loans are paid the banks assets DECREASE. But the banks liabilities decrease more. Right? I guess my question is anwsered.
Cmac c
CC BY-SA 4.0
2020-04-30T18:57:21.297Z
What are you talking about, an interest payment, or principal payment? For an interest payment, if there is an interest payable booked, the profit happened when the payable appears on the balance sheet. The asset and liability would decrease by the same amount. If you want to pursue that level of detail, you need to study an accounting textbook. It would have to be very advanced to cover bank accounting.
Brian Romanchuk
CC BY-SA 4.0
2020-04-30T12:58:16.017Z
2020-04-30T13:23:30.373Z
2020-04-30T13:23:30.373Z
Brian Romanchuk
<p>When the banks lends me money my demand deposits end up in his liabilities and my loan is on his assets. Lets say I paid that money to somebody who has an account at another bank. Lets ignore how the two banks settle that and just focus on that the bank has no liabilities to me and still has my loan on his assets. My employer pays me a salary via a bank transfer in my bank. No changes to my banks net liabilities - they just swapped owners. Now I make the loan payment. Does the bank just simply destroy my demand deposits? What happens to his asset side when I make that payment? What happens eventually to the loan on the banks assets when I finish paying my loan?</p>

<banking><debt><accounting>
What happens on a banks balance sheet when the borrower submits loan payments?
Cmac c
# What happens on a banks balance sheet when the borrower submits loan payments?

(Asked by: username_0 on 2020-04-30)

When the banks lends me money my demand deposits end up in his liabilities and my loan is on his assets. Lets say I paid that money to somebody who has an account at another bank. Lets ignore how the two banks settle that and just focus on that the bank has no liabilities to me and still has my loan on his assets. My employer pays me a salary via a bank transfer in my bank. No changes to my banks net liabilities - they just swapped owners. Now I make the loan payment. Does the bank just simply destroy my demand deposits? What happens to his asset side when I make that payment? What happens eventually to the loan on the banks assets when I finish paying my loan?

**Tags:** banking, debt, accounting


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## 1 answers

### Answer by username_1 on 2020-04-30. Score: 2 | Accepted answer

If you make a payment of \$X, then:

* loan balance (bank asset) goes down by \$X, and
* deposit balance (bank liability) goes down by \$X.

I.e., the bank balance sheet shrinks (as do money aggregates that include bank deposits).

The bank may have held a loan loss provision against the loan, and so the loan may have been carried on the balance sheet at less than \$X. For example, a bank might think there is an expected loss rate on this loan of 2%, so the bank would have a provision of .02\*\$X. The loan would be carried on the balance sheet at a value of .98X, not X. The creation of this provision generates a loss, causing a corresponding reduction of equity. (Note: how this is accounted for probably depends on the jurisdiction.) Note that there are no transactions associated with this loss, so it is a non-cash loss.

Since you paid off the loan in full, the provisioned loss did not materialise, and so it would be reversed. The value of the loan would be written up to \$X before cancellation. This would generate a non-cash profit, as equity would rise by the amount of the reversal of the loss provision.

In the comments, it was asked how banks make money on loans. They make money off the interest payments, which are supposed to be higher than the interest costs of the bank.

> **Comments:**
> **username_0**: "The bank MAY have held a loan loss provision". So how does the bank earn money if it did not hold it.  
> **username_0**: "how this is accounted for probably depends on the jurisdiction". Can you explain how it is accounted in YOUR jurisdiction.(the one you understand).  
> **username_0**: "the provisioned loss did not materialise, and so it would be reversed". What does "reversed" exactly mean?  
> **username_0**: Iˇm trying to figure how do banks make money on loans. When I pay their capital increases because of the increase in their assets or because of decrease in their liabilities? Provided no central bank reserves get invlolved in all transactions.  
> **username_0**: what is a "non-cash profit" in youre definition. Where does it appear on the banks balance sheet?  
> **username_1**: That’s a lot of questions, How does a bank make money? The bank charges a greater rate of interest on its loans than it pays its liabilities. That is how they are supposed to make money. I’ll add some comments to the answer.  
> **username_0**: That is a simplified explanation. I was wondering what actually goes on on the balance sheet. So far what I understood from other sources is that bank makes an "Interest receivable" entry in his assets along with a "loan receiveable". When the borrower pays those entries and the liabilities to the borrower get canceled. In the end the banks capital increases because of the decrease in his liabilities and not because he aquired an asset like everybody else says.  
> **username_1**: Well, since there’s no assets to acquire, anyone saying that is obviously wrong. The creation of an interest receivable is the same thing as saying the bank is earning interest on the loan.  
> **username_0**: Yes but it is still confusing because when loans are paid the banks assets DECREASE. But the banks liabilities decrease more. Right? I guess my question is anwsered.  
> **username_1**: What are you talking about, an interest payment, or principal payment? For an interest payment, if there is an interest payable booked, the profit happened when the payable appears on the balance sheet. The asset and liability would decrease by the same amount. If you want to pursue that level of detail, you need to study an accounting textbook. It would have to be very advanced to cover bank accounting.  

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