Additional Interest
Overview
With the Virgo release, other than the usual interest that is charged on the principal, the lenders can also charge an interest on the unused loan amount. This is termed as additional interest.
The additional interest collected in a loan helps to recover any losses due to an unused loan amount.
The interest rate of this additional interest component can be different from the normal interest rate and is not included in the EMI schedules.
UI Enhancement
This section lists the user interface enhancements made in various releases.
Oxygen
The following highlighted UI elements are added to the Interest Bearing Principal list of the Additional Interest Component section:
Spring'22
The following new checkbox is added to the Interest Component section:
Types of Interest-Bearing Principals
An additional interest can be charged on the following types of interest-bearing principal amounts:
Available Amount For Funding
This is the amount that is available to disburse to the borrower.
For Revolving Loans
Available Amount for Funding = Amount Not Funded + Amount Repaid By the Borrower.
In cases of revolving loans, the amount repaid by a borrower adds to the amount not funded, and that new amount becomes available to be funded.
For Non-Revolving Loans
Available Amount for Funding = Amount Not Funded.
Amount Not Funded
This is the amount not yet disbursed.
Sometimes a lender may want to charge an interest on the undisbursed loan amount. For example, if a lender has granted a loan of amount $10,000 to the borrower, and the borrower withdraws only half of it, then the lender may incur a loss on the remaining half till the borrower withdraws again. To recover any loss on this amount not yet utilized by the borrower, the lender may decide to charge an interest on this amount not yet funded.
If the borrower makes a payment toward an amount withdrawn, then that payment, which may be available for future funding is not considered as amount not funded.
Amount Not Funded = The Total Loan Amount - Amount Disbursed.
Credit Limit
This is the credit limit on the loan account.
For non-revolving FIT loans, you can specify a value in this field.
If there is no value specified in this field, the system considers it as the original loan amount.
Credit Limit = Loan Amount.
Delinquent Amount
This is the amount that the lenders can charge a default interest on whenever a loan becomes delinquent.
For more information, see the Additional Interest on Delinquent Amount section.
Custom
This is the amount that the lenders can charge on based on the custom additional interest calculation logic in the custom class.
For more information, see Additional Interest on Custom section.
Example to Describe the Additional Interests
Credit limit = $500.
Disbursed amount = $300.
Amount not funded = $500 - $300 = $200.
Amount repaid = $100.
Amount available for funding = $200 + $100 = $300.
Key Concepts
The behavior of additional interest is similar to that of regular interest. But, there are some concepts specific to additional interest. This section explains those specific concepts.
Creation
- The additional interest components are defined while creating a lending product, and the definition defaults to the contracts created from the lending product.
- This definition can be overridden while defining the contracts.
Change Credit Limit
- To change the value of Credit Limit for an FIT Loan, you can click the ChangeCredit Limit button on the contract and provide a new limit amount. This updates the value of the interest remaining field of the additional interest component, and the LAD changes to the date on which this change is made.
Accrual Start Basis
On disbursal, the interest accrued by the additional interest is updated in the Interest Remaining field and is calculated on the amount that is still not funded.
Depending on the value in the Accrual Start Basis field of the contract, additional interest is calculated in the following two ways:
Contract Date: When a disbursal is made, the interest is calculated for the period between the contract date and the disbursal date, and it is updated in the Interest Remaining field. Last Accrual Date (LAD) of the contract is then updated to this date of disbursal.
Disbursal Date: When a disbursal is made, the interest accruals start from the disbursal date, and the remaining amount for funding after the first disbursal is the starting principal amount for the additional interest. Interest Remaining of that component is 0.
For more information on how the Accrual Start Basis works, see Accrual Start Basis.
Additional interest is also affected by the Interest Period calculation. For more information on Interest Period calculation, see Interest Calculation.
Interest Accrual
Interest accrual for additional interest is calculated based on the interest calculation method selected and the type of principal selected.
Interest Calculation Type for additional interest can be Simple Interest or Future-Value Based, and it is calculated from the LAD to the current system date.
Note:The default selection for the Interest Calculation Type is Simple Interest.
The interest accrual transactions for the additional interest components are listed separately.
Any LAD changes, such as disbursal or payments, capitalize the additional interest and add to the loan balance.
At the time of interest posting, capitalized additional interest is not capitalized again.
Reversal of LAD-changing actions reverses the capitalized additional interest and the loan balance.
Interest Posting
If the interest is to be posted for the additional interest, the product must be IPT-enabled.
You can define the interest posting frequency of an additional interest. The default value of this frequency is the interest posting frequency defined for the contract.
The existing IPT jobs, the interest posting job, and the interest posting AMZ job create IPTs for each additional interest.
Interest Posted for additional interest = Interest Remaining + Interest Accrued till the next interest posting date of the additional interest.
When interest is posted for additional interest, an IPT of the type Additional Interest is created.
Capitalization
Additional interest can be capitalized if the interest posting is enabled in the product.
Existing IPT jobs capitalize the additional interest and add it to the loan balance.
The capitalization frequency is the same as the interest posting frequency of the additional interest.
The capitalization of the additional interest amount affects the repayment schedule and the forecast streams.
Note:When considering additional interest capitalization for Repayment Schedule and Forecast Streams, Available amount for funding is applicable only to loans with repayment plan with the first (n-1) terms selected for principal only or interest only payment types where n is the terms specified for the loan. This is because the calculation for the additional interest capitalization is not possible if principal only or interest only is not selected for the first (n-1) terms as there is a cyclical dependency between the loan balance and the additional interest. In other words, we need the loan balance to calculate the additional interest capitalization, but the loan balance, for available amount for funding, in turn depends on the additional interest for its calculation.
The interest on loan is based on the loan balance, which includes the additional interest amount. The loan balance is calculated as follows:
Loan balance = Principal Remaining + Interest Capitalized + Fee Capitalized + Additional Interest capitalized.
Rate Change and Rate Change Reversal
The rate change on the additional interest does not cause rescheduling of the loan, but changes the LAD.
The additional interest rate percentage can be changed through Rate Change action.
Bill Generation
Bill Amount varies based on the additional interest amount, and the value of the Add Interest to Bill flag.
If Add Interest To Bill = true
The additional interest accrued reflects in the Additional Interest Billed field on the Bill, and it is added to the bill amount.
In case of IPT-enabled loans, only interest posted amount is added to the bill.
The LAD changes to the bill generation date.
Interests accrued from various additional interest components go toward the respective Interest Remaining.
Backdated payments cannot work because of the LAD changes.
See the following example to understand this better.
If Add Interest To Bill = false
Bill Amount is the EMI amount on the schedules.
The LAD does not change.
Interest Remaining is not updated.
Any payment made toward the additional interest is made toward satisfaction of the bill.
See the following example to under this better.
- For example, if the bill amount = Principal + Interest + Fees =$100, and if additional interest = $50, then
- If Add Interest To Bill = true, then the due amount on the bill is calculated as $150. Now, if a payment of $150 is made, then $100 is satisfied toward Fees, Interest, Principal, and $50 toward Additional Interest.
- If Add Interest To Bill = false, then the due amount on the bill is $100. Now, if a payment of $100 is made, then $50 is satisfied toward Fees, Interest, Principal, and $50 toward Additional Interest.
You can change the value of the Add Interest to Bill flag for an Additional Interest component at the product or the contract level.
For more information on Add Interest To Bill, see Example: Additional Interest with Add Interest To Bill.
Payment
The default payment spread for additional interest is Fees, Additional Interest, Interest, Principal.
Note:The Payment Spread for Additional Interest must be created as a part of the post-install script.
- Manual spread can also be used to specify the additional interest amount.
While making a manual payment, you can see a list of interest components available to make payments, and specify the additional interest amount accordingly.
Note:For more information on how a payment is made with a payment spread, see Loan Payment Transaction.
- When a payment for a loan is made, the following fields with respect to the additional interest components are updated:
Last Accrual Date of the loan contract
Interest Paid
Interest Remaining
Interest Accrued
Interest Posted
Interest Capitalized
Payoff
Payoff amount includes the additional interest component value as well.
For the payoff quote, total additional interest is calculated as follows:
Total additional interest = sum of (interest posted + interest remaining + interest accrued) for each interest component.
Reschedule
When an LAD on the contract changes due to a manual reschedule, auto reschedule, or other loan actions, the system updates the accrued interest on the additional interest to the additional Interest Remaining field.
Bills are then marked as non-primary and the additional interest added to those bills is billed again. This amount is subtracted from the interest amount billed on the additional interest component. When the next billing job runs, it adds this amount to the bill again.
In cases of rescheduling of a loan, if the Maintain Delinquency flag is false and the Add Interest to Bills flag is true, then the additional interest is added to the future bills.
Total accrual entry amount includes both normal interest and the additional interest components.
Accrual Entry = (Interest Posted + Interest Remaining + Interest Accrued from LAD to date + Interest Paid) - Accrual Amount Accounted For
where Accrual_Amount_Accounted_For__c is calculated at runtime as the total interest calculated from the start of contract to the current system date and includes the interest components.
- For more information on creation of accrual transactions, see Accrual entry.
The additional interest payout for an investor is calculated as follows:
Additional interest payout amount = Minimum of ( investor interest amount, (investor interest amount / borrower interest amount) * interest component paid amount).
where
Borrower Interest Amount = Interest Accrued on the loan + Interest Remaining on the loan + Interest Posted on the loan.
Investor Interest Amount = Investor Interest Accrued + Investor Interest Remaining + Additional Interest Posted for the investor.
Interest Component Paid Amount = Interest Component Paid in loan.
Note:For additional interest in advance, the interest amount for borrower or investor is the corresponding interest posted.
For example, consider the following investor interest component details with the Advance Interest flag disabled:
Interest Posted = 50
Interest Remaining = 0
Interest Accrued = 12
Interest Rate = 12
Interest Calculation Method = Amount Not Funded
Total amount paid in loan = 120
Interest component paid in loan = 120
Then the following are calculated as:
Investor Interest amount = 50 + 0 + 12 = 62
Borrower interest amount = 130 (this amount is the loan interest paid and is taken from the loan payment transaction).
Additional interest payout amount = Minimum of (62, 62 / 130 * 120) = min (62, 57.23) = 57.23.
Note:For more information on how to make Investor Payout with Additional Interest, see Calculating Investors Payouts.
Add an Additional Interest Component
You can define and add one or more additional interest components to a loan product.
Prerequisites
The following are the prerequisites to define an additional interest component:
- All the fields required to define the additional interest must be added to the fieldset of the borrower in the Interest Component object.
- Select the Enable Fault Tolerant Batch Processing checkbox in Custom Settings > Org Parameters > Manage > Edit.
Steps
Perform the following steps to add an additional interest component:
Log in to your Salesforce account.
Click the App Launcher
.Search for
CL Loan, and then click it.Create a lending product.
While creating the lending product, if you want the interest to be posted, select the Is Interest Posting Transaction Enabled checkbox.
After the product is created, on the Interest Components tab, click New Interest Component.
In the New Interest Component window, specify the details as described in the following table, and then click Save:
Field Name Purpose and Action Interest Type For additional interest, the value of this field is selected by the system as Line Interest by default. Line Interest is nothing but Additional Interest. Interest Component Name Give an easily identifiable name. Interest Bearing Principal Select the principal amount on which the additional interest is to be charged.
Note:The default value selected here is Available Amount For Funding.
Supported Options:
- Available Amount For Funding
- Amount Not Funded
- Credit Limit
- Delinquent Amount
- Custom
Interest Rate Specify an interest rate for the additional interest.
Interest Posting Frequency Select the frequency at which you want the interest to be posted if interest posting is enabled at the product level. Is Capitalization Enabled To capitalize the interest, select this checkbox. Advance Interest To collect the interest in advance, select this checkbox.
For more information on Advance Interest, see Additional Interest in Advance.
Collect Advance Interest On Disbursal To collect the interest in advance and to deduct that from the amount that is to be disbursed, select this checkbox.
Note:This option works only if the Advance Interest checkbox is selected.
For more information on how Collect Advance Interest On Disbursal works, see Additional Interest in Advance.
Interest Posting Day Use this field if you want the interest to be posted on the ends of the months.
Note:The interest is first posted on the date specified in the Next Interest Posting Date field, and then it is posted on the 31st or the 30th of every month.
Next Interest Posting Date Specify the start date for the interest posting. The next interest posting date is auto-populated depending on the interest posting frequency specified.
Note:Specify this while creating the loan contract.
Include AIC in Minimum Interest Amount Select this checkbox if you want the system to include the additional interest calculation in the minimum interest amount too.
Note:This means 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.
For more information on this related to minimum interest, see the Minimum Interest section of this guide.
Create a loan contract from the lending product you created in the previous steps. The Additional Interest Component section of the loan contract displays the list of the additional interest components associated with this lending product. You can change the definition of any of these components.
Note:This section is visible only when the contract has the interest components defined.
Make a disbursement.
The additional interest is displayed in the Transactions tab.
Note:See the example in this section to understand better.
Change the Additional Interest Rate
Prerequisites
To change the additional interest rate, the following is the prerequisite:
- An Additional Interest is defined.
Steps
To change the additional interest rate, perform the following steps::
- On the CL Contract page, click the Loan Quick Menu.
- From the Loan Actions list, select Rate Change.
- In the Rate Change window perform the following actions:
- From the Rate Change Type list, select Additional Interest.
In the Parameters section, specify the following details, and then click Save.
Field Action New Interest Rate Specify the new interest rate. Interest Components Select the component for which the interest rate is to be changed. The rate change details are listed as other loan transactions in the Transactions > Other(s) tab.
To reverse the rate change of additional interest, perform the following steps:
In the Transactions > Other(s) tab, click the rate change Other Transaction ID.
On the Other Loan Transaction page ribbon, click the drop-down, and then click Reverse Rate Change.
- Click Confirm.
Waive the Additional Interest
You can waive the additional interest that is not yet collected from the borrower. You can also reverse the waiver.
Prerequisites
To waive the additional interest, the following is the prerequisite:
An Additional Interest is defined.
Steps
To waive the defined additional interest, perform the following steps:
On the CL Contract page, click the Loan Quick Menu.
From the Loan Actions list, select Waiver Action.
In the Waiver window, perform the following actions:
In the Waiver Type, select Additional Interest Component Waiver.
In the Waive Interest section, specify the following details, and then click Save:
Field Action Waive Percentage (%) Specify the percentage of the remaining interest that you want to waive. Waiver Amount Specify the amount (the remaining interest) that you want to waive. The waive interest details are listed as other loan transactions in the Transactions > Other(s) tab.
To reverse the waiving of additional interest, perform the following steps:
In the Transactions > Other(s) tab, click the waived interest Other Transaction ID.
On the Other Loan Transaction page ribbon, click the drop-down, and then click Additional Interest Waiver Reversal.
Click Confirm.
Example: Create and Apply Additional Interest
The following example describes how the additional interest feature works in CL Loan.
To understand this, example read the Additional Interest Definition image, Disbursements Details image, and the Explanation of the Additional Interest table in combination.
Image: Additional Interest Definition
The following image describes the definition of the additional interest used in this example. The details are explained in the table.
The following image highlights the details of the disbursements made in this example. The details are explained in the table.
Table: Explanation of Additional Interest
| Reference Point (as depicted in the preceding images) | Field Name on the Images | Description |
|---|---|---|
| 1 | Interest Bearing Principal | The additional interest is calculated on the amount available for funding. |
| 2 | Loan Amount | The loan amount to be disbursed is $1,00,000. |
| 3 | Interest Rate | The interest rate on the additional component is 2.5%. |
| 4 | Transaction Amount | The amount to be disbursed is $70,000. |
| 5 | Advance Additional Interest | The interest is calculated on the amount available for funding that is, $30,000($1,00,000 - $70,000) at 2.5 %. So, the additional interest on $70,000 is $625. |
| 6 | Financed Amount | This additional interest is collected in advance while defining the additional interest so it is deducted from the amount disbursed that is, $70,000. So, the amount disbursed is $69,375 that is after deducting the interest of $625 on the undisbursed amount of $30,000. |
| 7 | Interest Posting Frequency | Weekly; the interest on the additional component is posted weekly. |
| 8 | Last Interest Posting Date Next Interest Posting Date | The next date when the interest is to be posted. Works as per the interest posting frequency. |
| 9 | Interest Posted Interest Capitalized | The amount of interest posted. Note: The additional interest is posted if Is Interest Postedcheckbox is selected while defining the lending product. The amount of interest capitalized. Note: The additional interest is capitalized if Is Capitalization Enabledcheckbox is selected while defining the additional interest. |
Example: Additional Interest Component with Add Interest To Bill
Loan Contract Details
Let us say we have a loan contract with the following parameters:
| Parameter | Value |
|---|---|
| Loan Amount | $50,000 |
| Amount Disbursed | $10,000 |
| Interest Posting | Enabled |
| Interest Posting Frequency | Monthly |
| Time Counting Method | Month and Days |
The Additional Interest Components
Let us say that the lending product has three additional interest components, as follows:
| Additional Interest Component | Interest-Bearing Principal | Add Interest To Bill |
|---|---|---|
| Interest Component 1 | Available Amount For Funding = ($50,000 - $10,000) = $40,000. | True |
| Interest Component 2 | Amount Not Funded = ($50,000 - $10,000) = $40,000. | True |
| Interest Component 3 | Credit Limit = $50,000. | False |
Interest Components
Interest Component 1
Interest Component 2
Interest Component 3
Interest Posted for Each Interest Component
Now, after a month, the interest posted for each of the preceding interest components is calculated, as follows:
| Additional Interest Component | Interest Posted |
|---|---|
| Interest Component 1 | Principal * Time * Rate = 40000 * (30/360) * (10/100) = $333.33. |
| Interest Component 2 | Principal * Time * Rate = 40000 * (30/360) * (10/100) = $333.33. |
| Interest Component 3 | Principal * Time * Rate = 50000 * (30/360) * (10/100) = $416.67. |
Interest Posted for Additional Interest Components
Interest Posted for Interest Component 1
Interest Posted for Interest Component 2
Interest Posted for Interest Component 3
The Bill
The bill generated is highlighted in the following image:
Bill Generated
Due Amount = (Due principal + Due Interest) as per the repayment schedule on loan + Interest Posted for Interest Component 1 + Interest Posted for Interest Component 2 = (809.15 + 70.01) + 333.33 + 333.33 = 879.16 + 666.66 = $1545.82.
The due amount calculated did not take into consideration the interest posted by Interest Component 3 as the Add Interest To Bill flag on this component is false.
The Repayment Schedule
The Repayment Schedule that was generated for this loan is highlighted as follows:
Repayment Schedule
Due Amount = Due Principal + Due Interest = 795.83 + 83.33 = $879.16.
The Loan Payment Transaction
Because the Add Interest To Bill is false for Interest Component 3, on making a payment of $1,545.82, the Loan Payment Transaction depicts paid amount spread as follows:
Payment Made
Additional Interest = 333.33 +333.33 + 416.67 = $1,083.33.
Interest posted for all interest components is satisfied.
TransactionAmount = Additional Interest + Principal + Due = 1083.33 + 379.16 + 83.33 = $1545.82.
Example: Additional Interest Capitalization
Loan Contract Details
Let us say we have a loan contract with the following parameters:
| Parameter | Value |
|---|---|
| Loan Amount | $10,000 |
| Interest rate | 10% |
| Time counting method | Month and Days |
| Payment Frequency | Monthly |
| Start Date | 2013-03-01 |
Additional Interest Component
Let us say we have an additional interest component with the following parameters:
| Parameter | Value |
|---|---|
| Interest rate | 10% |
| Time counting method | Month and Days |
| Compounding Frequency | Weekly |
| Interest calculation method | Credit Limit |
| Number of days in a year for weekly | 364 |
| Credit Limit | $10,000 |
Table
The following table depicts the calculations of how the additional interest is capitalized in a repayment schedule:
Event | Date | Days | Interest | Additional Interest | Loan Balance | Interest | EMI | Principal Paid | Balance |
|---|---|---|---|---|---|---|---|---|---|
| Disburse | 2013-03-01 | $10,000 | |||||||
| 2013-03-08 | 7 | $19.44 = (10,000 * 10 * 7) / (100 * 360) | $19.23 = (10000 * 10 * 7)/(100 * 364) | $10,019.23 = $10,000 + $19.23 | |||||
| 2013-03-15 | 7 | $19.48 = (10019.23 * 10 * 7) / (100 * 360) | $19.23 | $10,019.23 + $19.23 = $10,038.46 | |||||
| 2013-03-22 | 7 | $19.52 | $19.23 | $10,038.46 + $19.23 = $10,057.69 | |||||
| 2013-03-29 | 7 | $19.56 | $19.23 | $10,057.69 + $19.23 = $10,076.92 | |||||
| Payment | 2013-04-01 | 2 | $5.60 = (10076.92 * 10 * 2) / (100 * 360) | $7,530.98 | $83.60= 19.44 + 19.48 + 19.52 + 19.56 + 5.6 | $2,552.62 | $2,469.02 | $7,530.98= $10,000 - $2,469.02 | |
| 2013-04-05 | 4 | $8.37 = (7530.98 * 10 * 4)/(100 * 360) | $19.23 | $7,550.21 | |||||
| 2013-04-12 | 7 | $14.68 | $19.23 | $7,569.44 | |||||
| 2013-04-19 | 7 | $14.72 | $19.23 | $7,588.67 | |||||
| 2013-04-26 | 7 | $14.76 | $19.23 | $7,607.90 | |||||
| Payment | 2013-05-01 | 5 | $10.57 | $5,041.45 | $63.09 | $2552.62 | $2489.53 | $5,041.45 = $7,530.98 - $2,489.53 |
Observations
The following are the observations from the preceding table:
The compounding for the additional interest is based on the interest posting frequency of the additional interest.
The loan balance increases by including the additional interest amount that is calculated on the credit limit.