Capitalization

Overview

You can capitalize the unpaid fees or interest amounts to accrue interest on these.

Interest Capitalization

Interest capitalization is a method where the interest is accrued on any unpaid interest. Interest is calculated on the principal amount and on the unpaid interest till date in case of non-payment. It is also termed as Interest on Interest. If the capitalization frequency is higher, the capitalized interest grows. For example, if the capitalization frequency is weekly instead of monthly, the capitalized interest growth is higher.

Note:

For more information on interest capitalization, see Create a Lending Product and Create a Simple Loan Contract sections, and to set up the UI Layout, see the Interest Capitalization section of this guide.

Fee Capitalization

Fee capitalization is a method where the interest is accrued on any unpaid fee or charge.

Calculation

The capitalized portion of the fee and interest amount is added to the loan balance (principal remaining + capitalized interest + capitalized fee). Interest calculation occurs on this higher balance amount. If a capitalized charge is waived, this reduces the loan balance. However, the payment schedule is not impacted as that is created on the Principal amount of the loan.

Capitalization to Increase the Outstanding Principal Amount (Payment in Kind)

You can also enable your loan to increase the outstanding principal amount when interest or a fee is capitalized. This is also called payment in kind.