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Definition
Every standard loan repayment splits into capital (also called principal) — the slice that reduces what you owe — and interest, the lender's charge. On a reducing-balance loan, early payments are weighted towards interest and later ones towards capital.
In plain terms
It is why paying a loan for a year can barely dent the balance early on: most of what you have paid was interest. As the balance falls, more of each payment chips away at the capital.
Why it matters for your company
Knowing the split matters for tax (interest is usually a deductible cost, capital repayment is not) and for planning early settlement. See is business loan interest tax deductible.
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