Partial Interest in Advance
Overview
Usually the interest on a loan contract is either charged at the end of the interest posting cycle or in advance for the tenure of a loan.
With the Mercury release, you can define a flexible repayment plan where the interest can be charged in advance only for a specified period of the loan tenure. This is called partial advance interest. Thus, you can have a loan that has both interest in advance and normal interest calculations.
The partial advance interest can only be applied to the Interest Only period of the loan in the first sequence of the Flexible Repayment Plan, after which the interest can be applied regularly to the remainder of the loan tenure. Once the partial interest in advance is applied in a flexible repayment plan, it cannot be applied again.
Key Concepts
- The interest in advance period must appear first in the order of the schedule specified in the Flexible Repayment Plan, and it cannotappear again in the Flexible Repayment Plan.
- The total terms in a Flexible Repayment Plan must be equal to the terms specified in the contract if Advance Interest is enabled in the Flexible Repayment Plan. If this condition is not met, the system displays an error message.For example, if a loan has 10 terms for payment, then the interest in advance period is defined for the first three terms, and the remaining seven terms are for the arrears.
- The system enables the Advance Interest flag on the loan contract during the interest in advance period of the flexible repayment plan, and disables it during the rest of the period.
- If the Advance Interest flag is true, the Interest Posting job queries the repayment plan and updates the Advance Interest flag on the loan contract accordingly.
- An IPT of amount zero is posted when the loan is transitioning from advance period to the arrears period.
- For the Advance Interest period in a repayment schedule, the interest is calculated for the current IPT cycle in advance where the start date for the interest calculation is the start of IPT cycle and the end date is the next IPT due date as per the interest calculation frequency. This means that for the advance period, the interest is posted at the beginning of the cycle.For the arrears period in a repayment schedule, the interest is calculated at the end of the IPT cycle.For more information on this, see Explanation of the Example.
Example
This section explains an example on how a repayment schedule gets generated when an interest in advance is charged partially on a loan.
To understand this example better, read the Read Me First section as follows:
Read Me First
Contract Details: This section describes the parameters based on which the contract used in this example is created.
Charge an Interest in Advance Partially: This section describes the steps to charge an interest in advance partially.
Repayment Schedule: This section describes the calculations in the generated repayment schedule.
Contract Details
Let's assume a contract is created with the following parameters:
| Parameter | Value |
|---|---|
| Disbursed Amount | $20,000 |
| Interest Rate | 10% |
| Terms | 3 |
| Contract Start Date | 3/1/2020 |
| Disbursement Date | 3/1/2020 |
Charge an Interest in Advance Partially
Let's assume an interest is charged in advance partially as described in this section.
Prerequisite
To charge an interest in advance partially on a loan, the following is a prerequisite:
- The value of the Repayment Procedure is selected as Equated Principal while creating a loan contract.
Steps
To charge an interest in advance partially on a loan, perform the following steps:
- While creating a contract, create a flexible repayment plan.To know how to create a flexible repayment plan, see Flexible Repayment Plan.
While creating a flexible repayment plan, add the sequence as highlighted in the following image:
Note:It is important that the Advance Interest with the Interest Only Payment Type is selected for the first sequence only and not later.
Complete creating the contract.This creates a loan with interest in advance charged partially.
Repayment Schedule
The Repayment Schedule generated is highlighted in the following image:
Explanation
The preceding repayment schedule is explained by understanding each date as depicted in the following table:
| Schedule Number | Advance Interest | Period Type | Due Date | Interest Posting Calculation Start Date | Interest Posting Calculation End Date | Interest |
|---|---|---|---|---|---|---|
| 1 | True | Advance Interest Period | 3/1/2020 | 3/1/2020 | 4/1/2020 | $20,000 * (10/100) * (30/360) = $166.67 |
| 2 | True | Advance Interest Period | 4/1/2020 | 4/1/2020 | 5/1/2020 | $20,000 * (10/100) * (30/360) = $166.67 |
| 3 | False | Arrears Period | 5/1/2020 | 5/1/2020 | 5/1/2020 | $20,000 * (10/100) * (0/360) = 0 |
| 4 | False | Arrears Period | 6/1/2020 | 5/1/2020 | 6/1/2020 | $9,958.50 * (10/100) * (30/360) = $82.98 |
For the date 5/1/2020 of the repayment schedule, the loan transitions from the advance period to the arrears period. The interest posted on 5/1/2020 has a zero value as the interest is calculated and posted for the period starting from 5/1/2020 to 5/1/2020 as seen in the preceding table.