Minimum Interest Calculation on Full Disbursal
Minimum interest used to be calculated on the first funding amount, but with the Hydrogen release, it can be calculated on the full disbursal amount. In the case of full disbursal, the system calculates the minimum interest on the amount that is approved by the lender. For example, if a loan amount of $1,000,000 is approved by the lender, but the borrower wants to borrow only $500,000, then the minimum interest is calculated on the full disbursal amount, $500,000. If a borrower wants to pay off the remaining loan amount, then the remaining minimum interest gets calculated, and is charged to the borrower's account. The borrower needs to pay this charge along with the principalremaining to close the loan. For example, a loan of $2,000 is disbursed on April 1, 2020, with a minimum interest of $500. On June 1, 2020, the borrower wants to pay off the remainingamount and close the loan. Interest already paid for the account is $300, then a charge of $200 is created for the borrower.
Prior to this release, the minimum interest amount used to be calculated as minimum interest amount - (interest posted + interest accrued + interest remaining + interest paid) till that day. But now while calculating the minimum interest portion (at any point in time), the additional interest component is also considered. The updated formula for calculating the minimum interest amount is mentioned later in this section.
Configuration
The following configurations need to be done to calculate the minimum interest on the full disbursed amount:
- The minimum interest feature is enabled.
- The loan must have a fee set, with Minimum Interest Prepayment Penalty Fee in it.
- The Fee Calculation Method is selected as Full Disbursal.
- Additional Interest Component is set up.
Example
Let's assume that a loan contract is created with the following terms and conditions:
| Loan Amount | $10,000 |
|
| Loan Interest Rate | 10% | |
| Term (in days) | 100 | |
| Minimum Interest Option | Minimum Interest Period | |
| Minimum Interest Period (In days) | 90 | |
| Additional Interest Component | 5% |
Scenario 1
The loan amount is disbursed in tranches. But the minimum interest is calculated on the loan amount, which is $10,000.
Minimum interest amount = principal * rate * period (when the Minimum Interest Period is specified) = $10,000 * 0.1 * 89/360 = $247.22.
Charge = minimum interest portion (at any point in time) = minimum interest amount - additional interest - (interest posted + interest accrued + interest remaining + interest paid) till that day = $247.22 - $20.83 - $41.67 = $184.72.
| Action | Result |
|---|---|
1. Disburse $5,000 of $10,000. On the payment date, the minimum interest and the additional interest are calculated. | 1. The payment amount is calculated as $523.20. |
| |
| 2. Additional interest is calculated on the available fund for disbursal, $5,000. | |
| |
| 3. Interest is calculated as $247.22. | |
| |
| 4. A charge is created for the interest remaining, $184.72. | |
|
Scenario 2
The loan amount is fully disbursed and the minimum interest is calculated on the loan amount that is $10,000.
As per the formula mention in Scenario 1, minimum interest amount = $10,000 * 0.1 * 89/360 = $247.22.
Charge = $247.22 - $83.33 - 0 = $163.89.
| Action | Result |
|---|---|
1. Disburse the full loan amount, $10,000. On the payment date, the minimum interest and the additional interest are calculated. | 1. The payment amount is calculated as $1,046.40. |
| |
| 2. Additional interest is calculated as 0 as the full amount is disbursed and the amount available for funding is 0. | |
| |
| 3. Interest is calculated as $247.22. | |
| |
| 4. A charge is created for the interest remaining,163.89. | |
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