Additional Interest on Delinquent Amount For the Borrower
Overview
You can charge an additional interest as a default interest on the delinquent amount for a borrower.
- For more information on adding an additional interest component, see Add an Additional Interest Component section in the Additional Interest section of this guide.
- For more information on charging an additional interest on delinquent amount, see Additional Interest on Delinquent Amount section.
Key Concepts
- Additional Interest is charged on the delinquent amount after considering the grace days if defined.
Additonal Interest accrual is calculated as follows:
Additional Interest Accrued = Unpaid Due Amount * (Number of days for which the loan is delinquent as per the Time Counting Method) * Rate
When there is an LAD-changing event in the contract, the additional interest accrued is calculated from the LAD (Last Accrual Date) or the (Oldest Unpaid Due Date + grace days), whichever date is later. For example, if the bill due date is June 1, and the bill is unpaid, then the loan becomes delinquent from June 2. However, if there are grace days defined in the system as 2, after considering the two grace days, the loan becomes delinquent from June 4. This means that from June 4, the additional interest starts getting charged on the delinquent amount. However, if there a rate change occurring on June 5, then the LAD changes to June 5 and the additional interest starts accruing from June 5, after adding any interest accrued on June 4 to the Interest Remaining.Hence, the interest starts accruing from the date that is derived from the following formula:
Interest accrual start date = max(LAD, (Oldest Unpaid Due Date + grace days))
Example: Charge Additional Interest on Delinquent Amount
Let us look at an example to understand how an additional interest on delinquent amount for the borrower works.
Create a Simple Loan Lending Product
Let us say a Simple Loan Lending Product is created with the following details:
| Lending Product Detail | |
| Is Interest Posting Transaction Enabled | True |
| Interest Posting Frequency | Monthly |
| Interest Component | |
| Interest Bearing Principal | Delinquent Amount |
| Interest Rate | 5% |
| Interest Posting Frequency | Billing Frequency |
| Time Counting Method | Month and Days |
Create a Contract
Let us create a contract with the following terms and conditions:
| Details | |
| Loan Amount | $20,000 |
| Contract Date | May 06, 2013 |
| Interest Rate | 10% |
| Next Due Date | June 06, 2013 |
| Delinquency Grace Day | 1 |
On the Next Due Date
On the Next Due Date, June 06, 2013:
- A bill gets generated with the Due Amount = $2092.81.
- Two IPTs are created as follows:
- Regular IPT with Interest Posted = Principal * Interest Rate of the loan contract * (Month and Days) = $20,000 * (10/100) * (30/360) = $166.67.
- Additional Interest IPT with Interest Posted = 0.
One the First Day after the Next Due Date
On the day after the Next Due Date, June 07, 2013:
- Additional Interest with Interest Accrued = 0 as one day is given as a grace day before the loan can become delinquent.
On the Second Day after the Next Due Date
On the day after the Next Due Date, June 08, 2013:
- Additional interest is accrued for a day on the unpaid bill amount as follows: Additional Interest Accrued = Unpaid Due Amount * (Number of days for which the loan is delinquent as per Time Counting Method) * Rate = $2092.81 * (1/360) * (5/100) = $0.29.
- Interest accrued on the loan contract is the sum of loan interest accrued for a day on the loan amount at 10% and the additional interest accrued for a day on due amount at 5% Interest Accrued on Loan = Interest Accrued on Loan Amount at 10% for 1 day + Interest Accrued in AIC on Delinquent Amount at 10% for 1 day = (20,000 * (10/100) * (1/360)) + (2092.81 * (5/100) * (1/360)) = 5.56 + 0.29 = 5.85.