Additional Interest in Advance

Overview

With the Hydrogen release, you can now calculate and charge additional interest in advance for a specified period.

Example: Additional Interest in Advance

This section explains the concepts of additional interest in advance with an example, and is divided into the following sections:

• The Loan Contract Details
• Disbursement Dates
• The Timeline Diagram
• Analysis of the Example

The Loan Contract Details

This section specifies the details of a loan with the additional interest needed to be paid in advance with the help of the following table:

Disbursement Details

This section provides the disbursement details of the dates on which the loan is disbursed with the help of the following table:

When the first disbursement is done on January 1, 2015, an IPT gets created on the same date for the additional interest. This IPT amount is calculated for the period between the disbursal date and the next interest posting date of the additional interest.

The Timeline Diagram

This section explains the example with the help of a timeline diagram.

The following timeline diagram explains how the system works for a contract with additional interest to be calculated in advance assuming the disbursement details provided in the preceding section:

Analysis of the Example

This section analyses the example with the help of the following:

• Disbursal
• Collect Advance Interest on Disbursal
• Interest Accrual
• Interest Posting
• Payments
• Out of Order Reversals
• Adjustment Entry
• Payoff Quote
• Accrual Transaction
• Rescheduling

Disbursal

• On the first disbursal, as soon as the loan is in Active - Good Standing status, an IPT is created for the advance interest and is capitalized, if applicable.

Collect Advance Interest on Disbursal

• If Collect Advance Interest On Disbursal = true

  • Advance interest is calculated on the value selected in the Interest Bearing Principal.

  • If the Interest Bearing Principal isCredit Limit, then Advance Interest = 1,00,000 * 5% * (30/360) = $416.67.

  • If the Interest Bearing Principal isAmount Not Funded or Available Amount For Funding, then Advance Interest = 90,000 * 5% * (30/360) = $375.

  • Two disbursal distributions are created as follows: one for the advance interest, and the other for (Amount Being Disbursed - Advance Interest).

  • Advance Interest IPT that was created as part of the disbursal is marked paid as it is already collected.

  • After the disbursal,

    • The value of the Principal Remaining and Loan Balance fields changes to $10,000.

    • Interest Posted and Capitalized = 0.

      Note:

      • Zero amount disbursal will not create Disbursal Distribution for advance interest. IPTs will be created as usual as the loan is in Active - Good Standing. When a next non-zero disbursal takes place, the additional interest IPTs become a part of the disbursal distribution and will be marked paid.
      • Second and further disbursal do not collect additional interest.
      • If disbursal amount < advance interest, then the system throws an exception that says that the minimum disbursal amount must be the advance interest.

• If Collect Advance Interest On Disbursal = false

  • There are no disbursal distributions and the advance additional interest IPT is not satisfied.
  • Principal Remaining = Disbursed Amount.
  • Loan Balance = Disbursed Amount + Advance Interest Capitalized.

Interest Accrual

• It is calculated on the loan balance like the regular interest.
• Additional interest component accrues interest normally from the LAD to the current date.

Interest Posting

• Advance interest is posted on the IPT due date and is calculated in advance from this date to the next due date. For example, if interest is posted on February 1, 2015, the interest to be posted is calculated betweenFeb 1, 2015, and the next posting date which is March 1, 2015. 

Payments

• Payments made can be used to satisfy the advance interest too.

Out of Order Reversals

• Out-of-order reversals can also be made for additional interest in advance.

Adjustment Entry

• Adjustment entry cannot be processed for additional interest in advance.

Payoff Quote

• The payoff amount does not include the interest accrued by additional interest when it is in advance.For example, on January 15 as per the preceding timeline diagram, if the payoff is calculated as $10,000 + $375 (advance interest), then the next day on January 16, the payoff is calculated as $10,000 + $2.88 (normal interest @ 10%) + $375 (advance interest).

Accrual Transaction

• Accrual entry for additional interest in advance = (Interest Posted for IPT cycles passed + Interest Remaining + Interest Accrued from LAD till date) - Accrual Amount Accounted For

  where Accrual Amount Account For is calculated at run time and is the total interest calculated from the start of the contract to the current system date.
• For more information on how the accrual entry is calculated for additional interest in advance, see the following Example: Accrual Entry Calculations.

Example: Accrual Entry Calculations

This section describes an example to understand the accrual entry calculations for the additional interest in advance with the help of the following sections:

• Additional Interest Parameters
• Date-wise Calculations

Additional Interest Parameters

Let us assume the following parameter values:

Date-wise Calculations

Let us see the calculations on each of the following dates:

• January 15

• January 31

• February 10

• February 15

• February 28

• March 10

• March 15

• March 31

On January 15:

• First disbursal = $10,000.

• An Advance IPT is generated.

• Amount Not Funded = $90,000.

  Additional Interest Posting #1	Date	Additional Interest Amount	Next Interest Posting Date
  	January 15	90,000 * 5% * (30/360) = $375 (Interest from January 15 to February 15)	February 15

• Next Accrual Entry Date = January 31.
• LAD = January 15.

On January 31:

• The accrual entry amount is calculated from January 15 to January 31.

  Accrual Entry #1	Date	Input Values	Accrual Entry Amount	Accrual Amount Accounted For	Next Accrual Entry Date
  	January 31	Interest posted for IPT cycles passed = 0 Interest Remaining = 0 Interest Accrued = 90,000 * 5% * (14/360) = $175(Interest from January 15 to January 31) Accrual Amount Accounted For = 0	$175	$175	February 28

On February 10:

• Amount Disbursed = $10,000.
• Amount Not Funded = $80,000.

On February 15:

• A second IPT is created.

  Additional Interest Posting #2	Date	Additional Interest Amount	Next Interest Posting Date
  	February 15	80,000 * 5% * (30/360) = $333.33 (Interest from February 15 to March 15)	March 15

• Payment is made on this day for the amount = $708.33.

• Advance Interest Posting #1 and Advance Interest Posting #2 are paid.

On February 28:

• The first IPT cycle has passed, and that amount is considered for Additional Interest Posted.

  Accrual Entry #2	Date	Input Values	Accrual Entry Amount	Accrual Amount Accounted For	Next Accrual Entry Date
  	February 28	Interest posted for IPT cycles passed = $375. Interest Remaining = 0. Interest Accrued = $144.44 (Interest from February 15 to February 28). Accrual Amount Accounted For = $175.	375 + 0 + 144.44 - 175 = $344.44	375 + 0+ 144.44 = $519.44	March 31

• Here, the Accrual entry for that specific entry = Interest posted for the IPT cycles passed + Interest Remaining + Interest Accrued - Accrual Amount Accounted For = 375 + 0 + 144.44 - 175 = $344.44.  

• Now the new value of Accrual Amount Accounted For amount becomes Interest posted for the IPT cycles passed + Interest Accrued = 375 + 144.44 = $519.44

On March 10:

• Amount Disbursed = $10,000.
• Amount Not Funded = $70,000.

On March 15:

• A third IPT is created.

  Additional Interest Posting #3	Date	Additional Interest Amount	Next Interest Posting Date
  	March 15	70,000 * 5% * (30/360) = $333.33 (Interest from March 15 to April 15)	April 15

On March 31:

• The first and second IPT cycles have passed, and we consider that amount for Additional Interest Posted.

  Accrual Entry #3	Date	Input Values	Accrual Entry Amount	Accrual Amount Accounted For	Next Accrual Entry Date
  	March 31	Interest posted for IPT cycles passed = $708.33 Interest Remaining = 0 Interest Accrued = $136.11 (Interest from March 15 to March 31) Accrual Amount Accounted For = $519.44	708.33 + 0 + 136.11 - 519.44 = $325	708.33 + 0 + 136.11 = $844.44	April 30

Rescheduling

You can reschedule a loan without discarding the IPTs for advance interest if the billing frequency and the next interest posting date for advance interest are not changed. The new schedule for the IPT is then effective from the next cycle.

For example, if the next interest posting date is February 1, and after reschedule, the next payment date is changed to February 15, then on February 1, an IPT is created, and the next interest posting date is set to February 15. Then onward, it follows the new schedule's due dates.