Quick answer
Principal and interest (P&I) means each loan repayment covers the interest charged for the period plus a portion of the amount borrowed, so the balance falls over time and reaches zero at the end of the term. It's the standard structure for business term loans, equipment finance and most commercial property loans once any interest-only period ends. Repayments are higher than interest-only, but total interest is lower.
Key points
- Every repayment reduces the loan balance as well as paying interest
- Two common versions: equal repayments, or equal principal with falling repayments
- Lenders usually test whether you can afford P&I, even on an interest-only loan
- Loans from a private company to its owners need P&I repayments under Division 7A
Principal and interest is the “pay it off as you go” way to borrow. Each instalment does two jobs: it covers the interest that built up since the last payment, and it knocks some of the borrowed amount off the balance. Keep paying on schedule and the debt is gone by the final instalment.
If you’ve had a home loan, you already know the idea. Business lending uses it for most term loans, equipment finance and longer commercial property loans.
Two ways lenders build a P&I repayment
Most people picture one version, but Australian lenders use two.
| Equal repayments | Equal principal | |
|---|---|---|
| What stays the same | The total repayment each period | The principal portion each period |
| What changes | The split: interest falls, principal rises | The interest falls, so total repayment falls |
| Where you see it | Most term, equipment and property loans | Some bank commercial facilities and farm loans |
| Cash flow feel | Predictable from day one | Heaviest at the start, lighter each year |
The equal-repayment version is easier to budget around. The equal-principal version pays the debt down faster early and costs less interest overall, but asks more of your cash flow in the first year.
A worked example without the jargon
Take a $240k loan to fit out a dental practice in Ballarat, repaid over four years using equal principal.
- Principal portion each month: $240k ÷ 48 = $5,000, every month.
- Interest each month is charged on whatever balance is left, so it’s highest in month one, when $240k is owing, and lowest in month 48, when only $5,000 remains.
- After two years, exactly half the loan, $120k, has been repaid, and the monthly interest charge has roughly halved compared with month one.
Under the more common equal-repayment version, the same loan would have a fixed monthly figure, but less than $120k would be repaid after two years because the early payments lean towards interest. Try both shapes in our business loan repayment calculator.
Why lenders assess you on P&I
Even when you ask for an interest-only period, most lenders test whether the business could meet full principal and interest repayments once that period ends. It’s part of their serviceability assessment and a common reason a bank offers less than requested. If that’s happened to you, our page on when the bank offers less than you asked for walks through the options, or send us the details and we’ll look at the gap.
Where P&I shows up in your own company
Here’s a corner of Australian tax law where P&I matters even with no bank involved. If your private company lends money to you or a related person, Division 7A generally requires a written agreement and minimum yearly repayments of principal and interest, capped at seven years, stretching to 25 years only when land is mortgaged to the company as security. Fall short of the minimum in a given year and the ATO can treat the gap as an unfranked dividend in your hands.
Lenders reading your financial statements notice these loans. A large director loan account doesn’t stop finance, but expect questions about it.
Related terms
Principal, amortisation, instalment, loan term and balloon payment.
Want repayments that match how money comes in?
The right repayment shape depends on how your income arrives: steady monthly fees suit equal repayments, while a business with a strong year ahead might prefer to pay principal down hard early. Tell us about the business through a short form that takes around sixty seconds. Asking won’t touch your credit score, and your enquiry isn’t fired off to every funder in the country. A team member studies your figures personally, then rings to talk through structures. The more accurate the numbers you enter, the closer our first suggestion will be.
Frequently asked questions
Why does so little of my early repayment reduce the balance?
Interest is charged on the outstanding balance, which is at its highest at the start. With equal repayments, more of each early payment goes to interest. As the balance falls, the interest share shrinks and more of each payment reduces the principal.
Is principal and interest cheaper than interest-only?
Over the life of the loan, usually yes. Because the balance drops from the first repayment, interest is charged on a smaller amount each period. Interest-only keeps repayments lower for a time, but you pay interest on the full balance for longer.
Can I switch from interest-only to principal and interest early?
Often yes, and many lenders allow it without a new application because it lowers their risk. Ask the lender how the new repayment is worked out and whether any fees apply.
Which part of a P&I repayment is tax deductible?
For a business loan, generally only the interest portion. The principal portion repays borrowed money. Lenders provide statements showing the split, which your accountant uses at tax time.
What is a Division 7A loan?
When a private company lends money to a shareholder or their associate, tax law requires a written loan agreement with minimum yearly repayments of principal and interest, or the amount can be treated as a dividend. The maximum term is generally seven years, or 25 years if secured by a registered mortgage over real property.