Future Value Based Interest
With the Virgo release of CL Loan, a new calculation method is introduced for calculating interest. When this method is selected, the system calculates the future value of a loan and then calculates the interest as the difference between the future value of the loan and the present value of the loan.
The compounding frequency must be defined for the calculation of this interest.
Compounding Frequency
Compounding Frequency is the frequency at which the unpaid interest gets added to the loan balance. While creating the lending product, lenders can opt to generate payment schedules by enabling the Compounding Interest. For more information on creating a lending product, see Create a Lending Product.
All contracts created for this product then compound the interest as per the compounding frequency and use the compounding interest when generating the repayment schedule.
The compounding frequency is used when calculating the schedule, if one of the following two conditions is satisfied:
- Payment frequency > capitalization frequency
- Difference between disbursal date and repayment start date is greater than the frequency of the loan.
Formula Used
The future value based interest is calculated using the following formula:
Formula
Future Value Based Interest = ((Loan Balance) * (1 + Rate/t)) ^ ((number of days / days in year) * t) - Loan BalanceThe fields in the above formula are explained in the following table:
| Fields | Description | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loan Balance | The present value of the loan post transaction. | ||||||||||||||||
| Rate | Interest rate | ||||||||||||||||
| t | The value of t depends on the compounding frequency selected as given in the following table:
| ||||||||||||||||
| number of days | The days we are calculating the interest for. This depends on the Time Counting method selected. For more information on Time Counting Methods, see Interest Calculation. | ||||||||||||||||
| days in year | The value of this depends on the Time Counting Method selected. For more information on Time Counting Methods, see Interest Calculation. |
Key Concepts
Interest is calculated on every due date of the repayment schedule using the above formula.
Time counting methods used are Month and Days, 30/360; Actual Days, 365/365; Actual Days (366), 366/366.
Note:Frequency semi-monthly payday is not considered.
For more information on Time Counting Method, see Interest Calculation.
Whenever the LAD (Last Accrual Date) changes, the loan balance increases, and the interest capitalized field is updated. For example, suppose the loan amount is 10,000. For the first due date, say, the interest capitalized is 100. Now, if this interest is not paid, from then on, the interest is calculated on the loan balance, which is 10,100 (loan amount + interest capitalized = 10,000 + 100).
If interest posting enabled loans does not require any additional changes, then the following are affected:
Payments: Interest capitalized and loan balance are reduced during the payment.
Reschedule: While rescheduling, we pass the value of loan amount to FinCalc, but here, instead of principal remaining, we pass the loan balance.
Usage of Future Value Based Interest
The future value based interest is used for interest calculations in the following:
Investment Orders
Compounding frequency at the Investment Order Product level must be defined. IO's compounding frequency can be equal to or greater than loan's compounding frequency.
- Interest is calculated using the new future value based interest formula.
Whenever the IO's LAD is changed, the interest is calculated based on the formula and added to the loan balance.
Note:For more information on Investment Order, see Investment Order.
Additional Interest Components
There is an option to select the formula for calculating interest in the interest component where you can select the future value based interest calculation.
FinCalc Changes
- The schedules created require the interest calculation and so, the future value based interest calculation is applicable here.
The events to increase the loan balance also requires the future value based calculations.
The following time counting methods are used while applying the future value based calculations to calculate the number of days and days in year:
30/360
Actual
Actual 366
Note:For more information on FinCalc, see Financial Calculator.
Example
Here is an example of a repayment schedule when a declining balance and a future value based interest calculation is used for a loan with the following details:
Loan amount = 1,000,000
Interest Rate = 10
Interest Posting Frequency = Monthly
Compounding Frequency = Monthly
Time Counting Method = Month and Days
Amount Funded = 10,000
Interest Calculation Method = Declining Balance
The first due interest is calculated as follows:
Due Interest = (PTR/100) = (10000 * (30/360) * 10)/100 = 83.33
where:
P = Principal
T = Time Counting
R = Rate
Interest Calculation Method = Future Value Based Interest Calculation
The first due interest is calculated as follows:
Due Interest = ((Loan Balance) * (1 + Rate/t)) ^ ((number of days / days in year) * t) - Loan Balance = ((10000 * (1 + (10/100)/12)) ^ ((30/360) * 12) - 10000 = 83.33