Minimum Interest

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Minimum Interest

Overview

With CL Loan, a lender can define the minimum amount of interest that can be collected in a loan to offset potential losses due to early repayment of a loan.

When an early repayment of a loan occurs, then the system checks if the minimum interest amount is already charged to the customer. If not, the system increases the payoff or the payment amount. This increased charge is applied during the last payment irrespective of whether it is a payoff type payment or regular payment.

Ways in which the minimum interest is charged

Minimum interest can be charged in one of the following ways:

  • By defining the amount or the Minimum Interest Amount.

  • By defining the period or Minimum Interest Period.

A lender can either define the minimum interest amount or the minimum interest period in a CL Contract. When a minimum interest period is defined, the minimum interest amount is calculated by the system for that period.

Calculate the minimum interest

Prerequisites

Following are the prerequisites for calculating minimum interest:

  • The minimum interest feature is enabled.

    Note:

    To enable the minimum interest feature, select Minimum Interest in the Servicing Configuration > Fee and Tax Setup > Manage Fees > Define New Fee > Fee Details >Time of charge list.

  • The loan must have a fee set that has a Minimum Interest Prepayment Penalty Fee in it. 

    Note:

    If this fee is not included, then corresponding charges are not created.

    Select the values for these fees as given in the following table:

    Field Name Action
    Fee Calculation Method Select First Funding.
    Time of charge Select Minimum Interest.
    Note:

    • If Fee Calculation Method is not First Funding, the system calculates the charge considering the full disbursement amount.

    • For First Funding, the Minimum Interest Period is for the first funding, the date is from the date of first funding, and the principal amount is the first funded amount.

    • However, when full disbursement is considered, then the period starts from the time the amount is disbursed and the complete disbursal amount is taken as principal (at contract level always, as disbursal is at the contract level).

    • This Minimum Interest Amount is dynamically created when Minimum Interest Period is given.

Include the Minimum Interest feature

The minimum interest feature can be included in any one of the following ways:

  • Add minimum interest feature to the org

  • Add minimum interest to the existing loan product

  • Add minimum interest to the existing loan contract

Add the Minimum Interest feature to the org

Steps

Perform the following steps to add the minimum interest feature at the org level:

  1. Log in to your Salesforce account.

  2. In the App Launcher , in the All Items section, click Loan Parameters.

  3. On the Loan Parameters page, click New.

  4. On the New Loan Parameters page, specify the details described in the following table:

    Field Name Action
    Minimum Interest Option

    Select one of the following ways to arrive at the minimum interest that is to be received: 

    • Minimum Interest Amount

    • Minimum Interest Period
    Minimum Interest Amount Specify the minimum interest amount to be received.
    Minimum Interest Period (In Days) Specify the minimum interest period in days up to which the minimum interest amount, to be received, is calculated.
    Minimum Interest Period (Date) Specify the minimum interest period date up to which the minimum interest amount, to be received, is calculated.

  5. Click Save.

Add the Minimum Interest feature to the existing loan product

The Minimum Interest feature can be updated in an existing Loan Product.

Steps

Perform the following steps to add the Minimum Interest feature to the existing lending product:

  1. Log in to your Salesforce account.

  2. In the App Launcher , in the All Items section, click Lending Product.

  3. On the Loan Products page, click the required loan product.

  4. Scroll down and in the Lending Product Detail section, click Edit Additional Parameters.

  5. On the Additional Parameters page, specify the details described in the following table:

    Field name Action
    Minimum Interest Option

    Select one of the following ways to arrive at the minimum interest that is to be received: 

    • Minimum Interest Amount

    • Minimum Interest Period
    Minimum Interest Amount Specify the minimum interest amount to be received.
    Minimum Interest Period (In Days) Specify the minimum interest period in days up to which the minimum interest amount, to be received, is calculated.
    Minimum Interest Period (Date) Specify the minimum interest period date up to which the minimum interest amount, to be received, is calculated.

  6. Click Save.

Add the Minimum Interest feature to the existing loan contract

The minimum Interest feature can be updated in an existing loan contract.

Steps

Perform the following steps to add the minimum interest feature to the existing contract:

  1. Log in to your Salesforce account.

  2. Click CL Contracts.

  3. Click the CL Contract ID that you want to choose.

  4. Click Edit Additional Parameters.

  5. On the Additional Parameters page, specify the details described in the following table:

    Field Name Action
    Minimum Interest Option

    Select one of the following ways to arrive at the minimum interest that is to be received: 

    • Minimum Interest Amount

    • Minimum Interest Period
    Minimum Interest Amount Specify the minimum interest amount to be received.
    Minimum Interest Period (In Days) Specify the minimum interest period in days up to which the minimum interest amount, to be received, is calculated.
    Minimum Interest Period (Date) Specify the minimum interest period date up to which the minimum interest amount, to be received, is calculated.

  6. Click Save.

Calculations

  • Minimum Interest Amount = Principal * Period * Rate (when Minimum Interest Period is specified)

    Note:

    To include Additional Interest Component too in the Minimum Interest Amount calculations, set the Include AIC in Minimum Interest Amount flag to true. For more information on this, see the Include AIC in Minimum Interest Amount section. 

  • Minimum Interest Portion (at any point in time) = Minimum Interest Amount (given) - (Interest Posted + Interest Accrued + Interest Remaining + Interest Paid) till that day.

    This is recalculated whenever a payment is made and is added to the unpaid interest portion of the payoff. 

  • Payoff amount = Total Payoff (as of today) + Minimum Interest Portion that is to be paid (calculated as per today's date).

  • Charge =The remaining portion of the minimum interest that is to be paid (at a given point in time) is defined as a charge.

Example

Loan Details After 2 months (if the user does pay off)
Principal (P) Rate (R) Time/Period (T) Minimum Interest Amount Interest Accrued Charge Payoff
10000 10 1 year 500 164.34 500-164.34 = 335.66

10000 + 164.34 + 335.66

Here, the Charge = remaining portion of the Minimum Interest Amount that is to be paid = Minimum Interest Amount - Interest Accrued.

The following table describes how the charge created by the system changes based on the amount paid by the user and the total minimum interest remaining till date:

Amount Paid by the User Total Interest Portion (Interest Posted + Interest accrued + Interest Remaining + Interest Paid) till date Charge Created by the System
Amount = Payoff Total Interest Portion < Minimum Interest Portion needed

  • Paid charge of Minimum Interest Prepayment Penalty Fee and update Fee Paid on loan.
Amount > Payoff Total Interest Portion < Minimum Interest Portion needed

  • Paid charge of Minimum Interest Prepayment Penalty Fee and update Fee Paid on loan.

  • Remaining amount goes against excess.
Amount < Payoff and Principal Remaining <= 0 Total Interest Portion < Minimum Interest Portion left to be paid.

  • Unpaid charge with paid amount as Paid portion and due amount as left portion, Update Fee remaining, and fee paid. 

  • Status becomes Active-Good Standing.

  • When next payment occurs, the Minimum Interest Portion will not be considered as we have already created a charge and added amount to fee remaining.
Note:

  • Loan Balance becoming zero before the maturity date indicates that an early payoff has been made.

  • Minimum Interest is charged only when there is an early payoff and if the interest collected till the payoff date is lesser than the Minimum Interest Amount. When the interest collected till the payoff date is lesser than the Minimum Interest Amount, then the system creates a charge for the remaining amount, which is (Minimum Interest Amount – the interest collected).

Example

The Payoff amount that is shown considers the Minimum Interest Amount that is to be paid. In the following example, as soon as the loan is created, the Payoff amount is shown as 15000, which includes the 10000 of Principal disbursed and the Minimum Interest Amount of 5000 to be collected.

During the payoff transaction, a Charge is created for the (Minimum Interest Amount - Interest Accrued)

Scenarios when the Charge changes

Depending on when the minimum interest amount is received, charge is created as explained in the following scenarios: 

Scenario 1

When the minimum interest amount is received before the minimum interest period date, the charge varies as described in the following table:

Amount Paid by the User Total Interest Portion (Interest Posted + Interest Accrued + Interest Remaining + Interest Paid) till date Charge Created by the System
Amount = Payoff Total Interest Portion < Minimum Interest Portion needed

  • Paid charge of Minimum Interest Prepayment Penalty Fee and update Fee Paid on loan.
Amount > Payoff Total Interest Portion < Minimum Interest Portion needed

  • Paid charge of Minimum Interest Prepayment Penalty Fee and update Fee Paid on loan.

  • Remaining amount goes against excess.
Amount < payoff and Principal Remaining <= 0 Total Interest Portion < Minimum Interest Portion left to be paid
  • Unpaid charge with paid amount as Paid portion and due amount as left portion, Update Fee remaining, and fee paid. 
  • Status becomes 'Active-Good Standing'.
  • When next payment occurs, the Minimum Interest Portion will not be considered as we have already created a charge and added amount to fee remaining.


Scenario 2

If the Minimum Interest Period date has crossed and minimum interest is still left to be received, then the system creates an unpaid charge of the required amount on the next day of the given date.

Include AIC in Minimum Interest Amount

With the Spring'22 release, Q2 Loan Servicing has been enhanced to add the option of including the Additional Interest Component (AIC) while calculating the Minimum Interest Amount if

  • The Minimum Interest Period is defined and

  • The Interest Bearing Principal for Additional Interest Component is "Credit Limit".

To include AIC within the Minimum Interest Amount calculation, a flag has been introduced on the Interest Component page. This flag is: "Include AIC in Minimum Interest Amount".

If this flag is set to true, the system includes the additional interest together with the regular interest in the Minimum Interest Amount calculation.

If the payoff is made within the Minimum Interest Period, a charge will get created with amount = Minimum Interest Amount - (Interest Paid + Additional Interest Paid)

What this means is that when a disbursal is made, the system calculates the Minimum Interest Amount by including both the regular and the additional interest for that period.

Thus, while disbursing, the system calculates the Minimum Interest Amount by including both the regular interest and the Additional Interest amounts for that period.

Thus, Minimum Interest Amount = Regular interest for that period + Additional Interest for that period.

Also, when a disbursal is made, the system immediately calculates the Payoff including the Minimum Interest Amount that has both the regular and AIC in its calculation.

Note:

This is not applicable for Amortized and Line of Credit type of loan product types.

Prerequisites

  • The contract must have AIC in it.

  • Interest Bearing Principle of the AIC = Credit Limit

  • Minimum Interest Option = Minimum Interest Period

Steps

  1. After the loan product is created, on the Interest Components tab, click New Interest Component.

  2. In the New Interest Component window, set Include AIC in Minimum Interest Amount flag to true.

  3. Specify the other details as described in the Additional Interest > Add an Additional Interest Component section of this guide, and then click Save.

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