Interest On Arrears
Overview
CL Loan 2.3007 and later versions enable you to apply interest on any unpaid dues and arrears for the Flexible Amortization Based Loan contracts.
For example, if a borrower fails to make a payment of $1000 that is due on January 1, then, from January 2, interest starts to accrue on the arrears of $1000. This is called interest on arrears, or IOA.
The interest on arrears (IOA) may be charged on:
- Unpaid Interest
- Unpaid Principal
- Unpaid IOA
The IOA on each component can get calculated at a different rate.
For example, if, in the dues of $1000, the principal is $600 and interest is $400, then interest on principal arrears may be charged at 8% while interest on interest arrears may be charged at 11%. The payment is next due on the next scheduled date. On the next posting date, the total interest on arrears is calculated and posted. You can specify these rates while setting up the lending product or at the time of creating the contract.
The following table lists the different types of interest posting transactions that may be created for a contract and their individual components.
IPT Type | Principal Component | Interest Component |
|---|---|---|
IPT Regular | Regular Principal due as per payment schedule is posted. | Regular Interest due as per payment schedule is posted. |
IOA on Unpaid P and I | Interest generated on unpaid regular principal. | Interest generated on unpaid regular interest. |
IOA on IOA | Interest generated for overdue IOA on principal. | Overdue interest on the interest generated for overdue IOA. |
UI Enhancement
This section lists the user interface enhancements made in various releases.
| Release | Serial No. | UI Enhancements | Additional Details |
|---|---|---|---|
Titanium | 1 | The following highlighted three new fields have been added to the CL Contract Detail page. | If you do not see these fields, you can add them to the page layout. Note: For more information, see Modify the Page Layout section in the Q2 Loan Servicing Administration Guide. |
|
Interest On Arrears Fields
With the Titanium release, the following three fields pertaining to Interest On Arrears are visible on the CL Contract Details page:
These can help you easily get the details of the interest on arrears at any point in time once.
Interest on Arrears Accrued (IOA Accrued): This captures the sum of interest accrued on the total delinquent principal and interest from the last LAD till the system date.
Interest on Arrears Remaining (IOA Remaining): This captures the sum of interest on arrears accrued and not paid till the last LAD.
Interest on Arrears Paid (IOA Paid): This captures the sum of the interest on arrears that had been accrued and paid off till date.
When, say, an LAD change occurs, then IOA Accrued goes to IOA Remaining, and then when the amount is paid, IOA Remaining goes to IOA Paid.
Example: How Interest On Arrears is Calculated
The following example illustrates how the system calculates the interest on arrears.
Consider a monthly loan with payment due dates of February 1, March 1, April 1, and so on.
Date | System behavior | Dues generated | Dues payable |
|---|---|---|---|
February 1 | The Interest Posting AMZ job creates an IPT of type Regular, say IPT1, with principal posted (P) and interest posted (I) value, as per the regular processing of the loan. This is due on February 1 itself. The IOA module of the job ignores this IPT for generating IOA as there are no arrears yet. It updates the Next Interest Posting Date* to March 1. | IPT1 of type Regular | IPT1 |
February 2-February 28 | Payment (IPT1 above) is not received as per schedule. |
| IPT1 |
March 1 | Assume IPT1 is still unpaid. The IOA module creates an IPT of type "IOA on Unpaid P and I", which includes IOA on unpaid principal and the IOA on unpaid interest for the entire month, as per the respective IOA interest rates specified in the loan product. This IOA IPT is due on the next payment date, that is, April 1. |
| IPT1 IPT2 IOA-of IPT1 |
April 1 | Assume IPT1, IPT2, and IOA on IPT1 are still unpaid. |
| IPT1 IPT2 IPT3 IOA-IPT1 IOA-IPT2 IOA on (IOA-IPT1 and IOA-IPT2) |
* Next Interest Posting Date - the next time when interest is posted. This must be the same as the payment date.
IOA calculation with delinquency grace days
If delinquency grace days are defined for a contract, IOA is created only after the grace days are over. The interest posting transaction, however, calculates interest on arrears starting from the due date. If the interest rate on due principal and due interest is zero or null, then both, IOA on unpaid principal+interest, and IOA on IOA are not created. Similarly, if the interest rate on due IOA is zero or null, then IOA on IOA is not created.
Application of borrower payment to dues
When a payment is received from a borrower, the system satisfies the dues in the following order:
You can configure this by enabling the New Payment Spread option in the Org Parameters.
The oldest IOA is paid first
IOA on Principal
IOA on Interest
IOA on IOA
Fee
Interest
Principal
Scenario 1: Payment is received between two posting dates
Suppose a payment is due on February 1, but the borrower makes a payment on February 5, then, the system calculates interest on arrears for 5 days - February 1 to February 5. This is added to the next bill amount.
Any grace days defined are taken into account while calculating the unpaid days. For example, if Late payment grace days are defined as 2, then the interest on arrears are calculated for 5-2 = 3 days.
Scenario 2: Multiple payments are received from a borrower
Suppose the borrower makes two payments, the first payment on February 5 and the second payment on February 10, which partially pay the dues. The system calculates the interest on arrears as follows:
- Up to February 5: IOA is calculated on the whole amount
- From February 5 to February 10: on the remaining unpaid
- February 11 onwards: on the final unpaid amount
Example: IOA Remaining when IOA on Unpaid Principal/Interest IPT is closed
Let us assume that an FAMZ lending product is created with the following details:
| Interest Calculation Method | Declining Balance |
| Default Interest Rate on Due Principal | 5% |
| Default Interest Rate on Due Interest | 6% |
| Default Interest Rate on Due IOA | 7% |
| Time Counting Method | Actual Days |
| Default Interest Rate | 10% |
| Is Interest Posting | True |
| Interest Posting Frequency | Monthly |
Let us move to September 15, 2014
Let us assume that an FAMZ loan contract is created from the preceding lending product with the following terms and conditions:
| Loan Amount | $10,000 |
| Contract Date | September 15, 2014 |
| Interest Rate | 10% |
| Payment Start Date | October 15, 2014 |
| Payment Term | 10 |
| Interest Rate Change Method | Change Payment Amount |
Let us move to November 15, 2014. The LAD gets updated to November 15, 2014, hence the Interest On Arrears Accrued moves to Interest On Accrued Remaining, and the system starts accruing Interest On Arrears from today.
Interest On Arrears Remaining on the loan details page is calculated as follows:
Interest On Arrears Remaining = Interest On Arrears Accrued till yesterday.
= Interest on Unpaid Principal Posted for 31 days from October 15 to November 14 + Interest on Unpaid Interest Posted for 31 days from October 15 to November 14.
= [Unpaid Principal Posted * 5% * 31 days] + [Unpaid Interest Posted * 6% * 31 days].
= [964.08 * (5/100) * (31/365)] + [82.19 * (6/100) * (31/365)].
= 4.09 + 0.42.
= $4.51.
Example: How Interest on Arrears is included in Payoff Quote and Payoff
For an example of how Interest on Arrears is included in Payoff Quote and Payoff, you can see the Example subsection of the Pay off a Flexible AMZ loan section of this guide.