Automatic Interest Adjustment
Overview
When a backdated transaction occurs, the system automatically adjusts the interest for you to arrive at the correct interest. The adjusted interest gets adjusted against the next interest posting transaction for IPT-enabled loans and against the Interest Remaining for non-IPT-enabled loans. This is automatic interest adjustment.
How is the interest adjusted in the case of a capitalized loan and in the case of a non-capitalized loan?
Capitalized loan
In the case of a capitalized loan, both the following fields are updated for the adjustment of interest:
Adjusted Interest Capitalized:
This field stores the adjusted amount till the last capitalized date (or the IPT date).
Adjusted Interest Non-Capitalized:
This field stores the adjusted amount from the last capitalized date (or IPT date) till the LAD date.
Non-capitalized loan
In the case of a non-capitalized loan, the following field is updated for the adjustment of interest:
Adjusted Interest Non-Capitalized:
This field stores the value of the adjusted interest from the backdated payment date till the LAD date.
Examples
For a detailed example on how exactly the system adjusts the interest internally for a capitalized and a non-capitalized loan, see :
How is the interest adjusted in the case of a non IPT-enabled Simple Loan?
Non IPT-enabled loan
In the case of a non IPT-enabled loan, the Interest Remaining field is updated for the adjustment of interest.
Once the backdated payment is reversed or made, the system adjusts the interest automatically and adjusts it to the Interest Remaining.
In the case of a backdated payment reversal, the adjusted interest is positive and in the case of a backdated payment, it is negative. And the adjusted interest is added to the Interest Remaining (IR). For example, if Adjusted Interest = $20.66 and IR is $100, then the new IR amount would be $120.66.
In the case of a backdated payment for a non IPT-enabled loan, the value of adjusted interest is negative and the same is adjusted in the Interest Remaining. For example, if, due to the back dated payment, the value of adjusted interest is -20 and the Interest Remaining is 10, then the new value of Interest Remaining would be -10. After that, if any LPT is made and the total interest calculated is 8, then there is no portion of LPT that would go toward the interest and the Interest Remaining would be updated to -2.
If a loan is closed, and the Interest Remaining field holds a negative value after satisfying all the components, then the same is adjusted in the excess amount.
Example
For a detailed example on how exactly the system adjusts the interest internally for a non IPT-enabled loan, see:
Example: Automatic interest adjustment for an IPT-enabled, capitalized loan in case of a backdated payment
Let us say a loan of $20,000 is created, approved, and disbursed on May 1, 2022, at 15% interest rate for 12 months term and interest is posted at billing frequency.
Let us also say the Time Counting Method selected is Actual Days and the following parameters are set:
- Create Summaries = true
- Enable Adjustment Entry = true
Is Interest Posting = true
Is Capitalization Enabled = true
Interest Posting Frequency = Billing Frequency
Payment Application Mode = Future Dues
IPT = Interest Posting Transaction
IA = Interest Accrued
Scenario before a backdated payment
Let us see the following initial scenario of this loan when a regular payment is made on June 6.
| Date | LPT (Payment of Principal + Interest) | Principal Remaining | Interest | Interest Calculations | Other Parameters |
|---|---|---|---|---|---|
| May 1, 2022 | None | $20,000 |
|
| |
June 1, 2022 (LAD-1) | None | $20,000 | IPT-1 = $254.79 | Interest = PTR/36500 = 20,000 * (31/365) * (15/100) = $254.79. |
|
| June 6, 2022 | None | $20,000 | IA-1 = $41.62 | Interest = 20,254.79 * 5 * 15/36500 = $41.62. |
|
June 6, 2022 (LAD-2) | Payment of bill Due Amount = 1,551.02 + 254.79 = $1,805.81 | $20,000 - $1,551.02 = $18,448.98. |
|
Loan Transaction Statement before a backdated payment
The Loan Transaction Statement as on June 6, 2022, before a backdated payment is as follows:
Scenario after a backdated payment
Now let us see what happens when a backdated payment for May 20 is made on June 6. The system calculates internally from May 20 in the following way:
| Date | LPT (Payment of Principal + Interest) | Principal Remaining | Interest | Interest Calculations | Other Parameters |
|---|---|---|---|---|---|
| May 1, 2022 | None | $20,000 | |||
| May 20, 2022 | $6,000 (backdated payment) | $20,000 - $6,000 = $14,000 |
| Reserve Amount Not Due = $6,000 | |
June 1, 2022 (LAD-1) | None | $14,000 | IPT-2 = $225.21 |
|
|
| June 6, 2022 | None | $14,000 | IA-2 = $29.229 | Interest from June 1, 2022, till LAD-2 = 14,225.21 * 5 * 15/36500 = $29.229. | |
June 6, 2022 (LAD-2) | Payment of bill Due Amount = 1,551.02 + 254.79 = $1,805.81 | $14,000 - $1,551.02 = $12,448.98. |
The green colored rows in the preceding table indicate the changes in the internal calculations when a backdated payment for May 20 is made.
As we see there is a difference in the interest amounts due to a backdated payment for May 20 made on June 6.
LPTs, IPT, and OLT
The following images display the Loan Payment Transactions, Interest Posting Transaction, and Other Loan Transaction events that occurred at the posted dates:
Adjusted Interest Calculations
Adjusted Interest Capitalized field stores the adjusted amount till the last capitalized date, which, in this example, is June 1.
Thus, Adjusted Interest Capitalized = (IPT-2) - (IPT -1) = 225.21 - 254.79 = -29.58.
Adjusted Interest Non-Capitalized stores the value from the last capitalized date till the LAD date, which is June 6.
Thus, Adjusted Interest Non-Capitalized =(IA-2) - (IA-1) = 29.229 - 41.62 = -12.39.
We see that the adjusted interest amount is negative in case of a backdated payment.
We can see the calculated values reflected in the Posting and Capitalization Details tab on the loan page as highlighted in the following image:
Loan Transaction Statement after a backdated payment
Example: Automatic interest adjustment for a non IPT-enabled loan in the case of a backdated payment that is created beyond two LPTs
Let us say there is a loan with the following terms and conditions:
- Create Summaries = true
- Enable Adjustment Entry = true
Loan Amount = $10,000
Interest Rate = 10%
Term = 10
Time Counting Method = Month And Days
Is Interest Posting = false
Is Capitalization Enabled = false
Payment Application Mode = Future Dues
Payment Frequency = Monthly
Contract Date = March 1, 2013
LAD = Last Accrual Date
IA = Interest Accrued
PR = Principal Remaining
LPT = Loan Payment Transaction (Payment)
IR = Interest Remaining
Before a backdated payment
Let us consider the following state of the loan before a backdated payment is made.
| Date | Action | Results |
|---|---|---|
| March 1, 2013 | Loan is created, approved, and disbursed. |
|
| April 1, 2013 |
| |
| April 15, 2013 | None |
|
| April 15, 2013 | LPT-1 of $1,000 |
|
| May 1, 2013 | None |
|
| May 10, 2013 | None |
|
| May 10, 2013 | LPT-2 of $500 |
|
| May 25, 2013 | None |
|
LTS before a backdated payment
After a backdated payment
Now let us see the state of the loan after a backdated payment of $500 is made on May 25 for March 10:
| Date | Action | Results |
|---|---|---|
| March 1, 2013 | None |
|
| March 10, 2013 | None |
|
| March 10, 2013 | LPT-3 of $500 |
|
| April 1, 2013 |
| |
| April 15, 2013 | None |
|
| April 15, 2013 | LPT-1 of $1,000 |
|
| May 1, 2013 | None |
|
| May 10, 2013 | None |
|
| May 10, 2013 | LPT-2 of $500 |
|
| May 25, 2013 | None |
|
The green colored rows in the preceding table indicate the changes in the internal calculations when a backdated payment for March 10 is made.
LTS after backdated payment
OLT after backdated payment
An OLT of the type, Adjusted Interest, and of amount, -$8.33, gets created in the system:
Adjusted Interest Calculation
Adjusted Interest Non-Capitalized
= (Total Interest Accrued after backdated payment - Total Interest Accrued before backdated payment) - (Last Interest Accrued after backdated payment - Last Interest Accrued before backdated payment)
= {(25 + 55.42 + 36.94 + 38.32 + 21.56 + 34.11) - (83.33 + 38.89 + 40.54 + 22.81 + 36.19)} - (34.11 - 36.19)
= (211.34 - 221.76) - (-2.08)
= -10.42 - (-2.08)
= -8.33.
The total interest to be adjusted = -8.33. This is adjusted to Interest Remaining. Thus, Interest Remaining = -8.33.
Example: Automatic interest adjustment for an IPT-enabled, non-capitalized loan in the case of a backdated payment
Let us understand how the system adjusts the interest automatically with the help of an example.
Let us say there is a loan with the following terms and conditions:
- Create Summaries = true
- Enable Adjustment Entry = true
Loan Amount = $10,000
Interest Rate = 6%
Time Counting Method = Month And Days
Is Interest Posting = true
Is Capitalization Enabled = false
Interest Posting Frequency = Billing Frequency
Payment Application Mode = Future Dues
Events and calculations in a chronological sequence
Let us now look at the following table to see how the system calculates interest and other parameters in chronological order of dates:
| Date | Action | Internal Calculations |
|---|---|---|
| March 1 | Payment of $2,000 |
|
| April 1 | None |
|
| April 30 | Payment of $500 |
|
| May 1 | None |
|
| May 6 | None |
|
| May 9 | Payment of $2,000 |
|
| May 11 | Payment of $1,000 |
|
| Backdated payment of $1,000 for May 6 |
| |
| Internal recalculations from May 6 after the backdated payment | ||
| May 6 | Payment of $1,000 |
|
| May 9 | Payment of $2,000 |
|
| May 11 | Payment of $1,000 |
|
The green colored rows in the preceding table indicate the changes in the internal calculations when a backdated payment for May 6 is made.
As observed from the preceding table, when a backdated payment is made on May 11 for May 6, the system begins recalculating from May 6 as depicted by the rows in green color. It then finds out the difference between the current interest amount after the backdated payment and interest amount prior to the backdated payment and stores it in the Adjusted Interest Non-Capitalized field. This amount then gets adjusted in the interest of the next Interest Posting cycle.
Contract details on May 11 after a backdated payment for May 6
The Interest Remaining on the CL Contract Details page displays the value that was before the backdated payments. It does not display the value calculated internally after the backdated payment. The difference between the value before and the value after the backdated payment is displayed in the Adjusted Interest Non Cap field.
If the system is not enabled for the internal adjustment of interest, you can make a payment again on May 11, 2015, but you could not make a payment before May 11, 2015. But, if the system is enabled for the internal adjustment of interest, you can do a backdated payment before an LAD date.
Loan Transaction Statements on May 11 before a backdated payment
Loan Transaction Statement on May 11 after a backdated payment for May 6
OLT Type: Adjusted Interest
Adjusted Interest Calculations
In the case of a non-capitalized loan, the following field is updated for the adjustment of interest:
Adjusted Interest Non-Capitalized: This field stores the value from the backdated payment date till the LAD date.
Thus, Adjusted Interest Non-Capitalized = $11.096 - $11.92= -$0.824.
This interest is adjusted or added to the next Interest Posting amount. In other words, since there is an extra amount already paid after a backdated payment, it is reduced from the next Interest Posting amount.
Interest rounding in adjustment entry (Interest Adjustment) calculations
The interest is rounded at the end of each IPT cycle. This is done to enhance the precision of calculations. Furthermore, any difference between the loan balance indicated on the loan and the one on the Loan Transaction Summary is allocated to the Adjusted Interest Capitalized field and is subsequently considered in the next cycle.
(When a loan is capitalized, the loan balance rises with each cycle as interest is added to the loan balance, and because rounding occurs at each cycle, the total loan balance at the end of the adjustment entry cycle calculated by the formula field on the loan contract may differ slightly from the one in the Loan Transaction Summary. This difference is assigned to the Adjusted Interest Capitalized field to ensure correctness in the calculations.)
The interest on all non-capitalized loans is rounded only once at the end of the whole interest adjustment calculation cycle, which is the current LAD of the contract.
Note: Whether the numbers are rounded up to two decimal places or more depends on the Digits After Decimals specified in the Org Parameters. Digits After Decimals field indicates the number of digits you would like to see after the decimal for all amount fields. For more information on the Org Parameters, see Salesforce Setup > Define Key Custom Settings > Define Org Parameters section of the Q2 Loan Servicing Administration Guide.
Note: Interest Adjustment calculation cycle begins from the date the earliest backdated payment is made to the current LAD. For example, let us say today is May 10 and LAD is May 1 and we make a backdated payment as on March 10. The interest adjustment calculations cycle begins from March 10 and ends on the current LAD of the contract, which is May 1. Post that, Interest Accrued Not Due gets updated on the new Loan Balance (from May 1 to May 10.)