Create a Line of Credit Contract

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Create a Line of Credit Contract

Line of Credit is a credit arrangement in which a financial institution agrees to lend money to a customer up to a specified limit. Generally, a line of credit is arranged before the funds are actually required, thus providing flexibility to the customer to meet short-term cash needs when the need arises. The purpose of borrowing can be either for personal need or business-related. The advantage of a line of credit over a regular loan is that interest is usually not charged on the part of the line of credit that is unused, and the borrower can draw on the line of credit at any time. 

For  example,

If you  have a $10,000  line of credit on a credit  card,  you  may  borrow as much or as little as you  want up to that  amount,  and  you  pay  interest  only on the  amount  you  have  borrowed.

If you  carry a balance of $3,000,  you  only  pay  interest on that  amount,  but  there is still  $7,000  available  for  you to borrow. Once  you  repay  the  amount  you  borrowed,  you  can  use it again.

The table given below explains the differences between a loan and a line of credit:

Loans Line of Credit

  • A loan is used only once.

  • A line of credit can be used multiple times.

  • You obtain a loan only when you need it

  • You obtain a line of credit before you actually require it.

  • You have to repay principal and interest for the loan, although there are a few exceptions like an interest only period on some loans.

  • You only make payments for the amount of money you have borrowed. For example, if your principal balance is 0, monthly payment due is 0 as well.

  • Most loans carry closing costs.

  • Line of Credit has minimal or no closing costs.

  • Fixed terms or amortization period due to which monthly payments are usually higher.

  • Monthly payments are usually lower as principal repayment may be made at the end.

  • Usually serve a long term purpose.

  • Usually serves a short term purpose. For example, funding a marketing campaign, or payroll disbursal.

  • Generally a higher Interest rates but rate is normally fixed.

  • Generally a lower Interest rate, but rate is normally variable.

You can make a zero amount disbursal to activate an LOC immediately, if required. Bills of zero amount are generated  if no other disbursal is made before billing date. For more information on disbursing an LOC, refer to section Disbursing a Line of Credit.

Prerequisites

The following are the prerequisites to creating a line of credit application:

  • The user is assigned to the company.

  • A lending product is created with product type as Line of Credit.

  • The lending product is assigned to the company.

  • Fees and fee set are defined.

Steps

Perform the following steps to create a line of credit application:

  1. Log in to your Salesforce account. 

  2. Click CL Contracts and select New.

    If you do not see the New button, then perform the steps provided in the Add the New Button in CL Contract Page for Lightning View of the CL Loan Administration Guide.

  3.  Select Line of Credit as the required Record Type of new record.

  4. Click Continue.

    1. Select Contact, if you want to create a loan application for a Contact.

    2. Select Account, if you want to create a loan application for a Account.

  5. Specify the Contact Name. Contact Name can be selected with the help of look up icon.

  6. Specify the Purpose of the Loan. For example, Personal.

  7. Select the Product Name. 

    Note:

    The fields: Payment frequency, Minimum Draw amount, Draw term payment percentage, Repayment term payment percentage, Minimum draw  amount, Draw billing method, Repayment billing method, and Minimum billing method are fetched from the Loan Product that is selected under the Product Name.

  8. Specify the Credit Limit.

  9. Specify the Draw Term. 

  10. Specify the Late Charge Grace Days.

  11. Specify the Pre-bill Days.

  12. Specify the Delinquency Grace Days. 

  13. Specify the Write off Tolerance Amount.

  14. Specify the Business Hours.

  15. Click Save. An application with the status, Partial application is created. 

Once the LOC contract is created, you may perform the following actions over the life time of the contract. 

  • Interest calculation on average daily balance using simple interest.

  • Due day change for LOC - CL Loan provides the ability to change the due day of payments such that it aligns with cash flows. For example, if a loan is due on the last day of every month and the borrower requests to change the due day to the 5th day of every month, it can be changed. 

  • Term extension (Maturity date) - A borrower may proactively request a lender to defer the remaining bills and thereby the payments on a loan. The deferral of a bill results in the extension of the maturity date and prevents a loan account from becoming delinquent.

  • LOC pay off - LOC payoff, or prepayment or early repayment, occurs when a borrower completely repays the loan. 

  • Disbursal reversal - You may need to reverse a disbursement in situations where a disbursement transaction was made in error and it needs to be reversed. After the reversal the amount is reduced from the disbursal amount. For more information on reversing a line of credit dsibursal, refer to the section, Reversing a Line of Credit Disbursal.

  • Advance and excess payment.

  • Credit limit change - Credit limit is the maximum advance amount that can be given to the customer during the life cycle of a contract. The lender can change the credit limit and thenew credit limit must be lesser than the Maximum Financed amount which is defined under the loan product. For more information on credit limit change, refer to the section Changing the credit limit.

  • Draw term change - The period in which the amount can be disbursed to the customer can be changed by the lender.

  • Disbursal validations – for example, no disbursals are allowed in pre-billed days.

Filed reference

Fields Description
Credit Limit The credit limit is the maximum advance amount that can be given to the borrower at any point of time.
Draw Term This is the period in which the amount can be disbursed to the customer.
Late Charge Grace Days This is the number of days the system waits before applying late charge on the loan.
Pre-bill Days This is the number of days before the bill should be generated before the actual installment date.
Delinquency Grace Days This is the number of days the system waits before categorizing the account as a delinquent account.
Write Off Tolerance Amount This determines the maximum tolerance amount the system can write off in case of delinquency.   

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