Interest Calculation

Overview

An interest rate is an amount charged by a lender to a borrower for the use of assets. This is expressed as a percentage of the principal.

The method of charging interest on a loan amount is defined in the CL Contract.

Interest can be of the following two types:

Fixed: Interest calculated for the duration of the loan.
Floating: Interest that may change during the lifetime of the loan.

Note:
For more details on floating interest, see Floating Interest.
Alternative Reference Rate: Interest that is fetched from an external calculator or determined manually by specifying the bill amount.

The system calculates interest as follows:

Interest = {(Principal x Rate of Interest) / Days in the Year } x Days in the Month

Time Counting Methods

The Time Counting Method determines how interest is accrued over a period of time for a variety of investments, loans, or mortgages.

Note:

To learn more about Time Counting Methods and how they are used in Q2 Loan Servicing computations, see Time Counting Methods and the Calculations

CL Loan uses the Time Counting Method to calculate the number of days between two dates. There are a total of five Time Counting Methods. They are:

Month and Days (30/360): This indicates 360 days per year, assuming that each month has 30 days.
Actual Days (Actual/365): This indicates 365 days per year, considering the actual number of days for each month. So, the system counts 31 days for January, 28 days for February, and so on, irrespective of the leap year.
Actual Days (366): This indicates 366 days per year, assuming 365 days for ordinary years and 366 days for a leap year.
366/365: This indicates 365 days per year, considering the actual number of days for each month taking into account the leap year where February would have 29 days in a leap year.
Actual/360: This indicates the actual number of days in a month, but the year is assumed to have 360 days.

Note:

In instances where the CL Loan Contract uses Financial Calculator Version 2.0, the system ignores February 29 and considers only 365 days as the actual number of days in a year.

Example

Assume a loan with an interest rate of 8% and payment due dates of February 25, 2016, and then March 05, 2016. Then, the system calculates the interest as described in the following table:

Method	Description	Per day interest	Number of days
Month and Days (30/360)	Indicates 360 days per year, and 30 days in each month, including February. Note: For weekly and bi-weekly loans, the Time Counting Method is always Actual Number of Days/364 days.	(0.08/360)* P	10 (26th-30th Feb + 1st-5th Mar)
Actual Days (Actual/365)	Indicates 365 days per year. When counting days between two dates, for example, the system counts 31 days for January and 28 days for February, irrespective of leap years.	(0.08/365)* P	8 (26th-28th Feb + 1st-5th Mar)
Actual Days (366)	Indicates 366 days per year for leap years and 365 for non-leap years.	(0.08/365)* P for non-leap year (0.08/366)* P for leap year	9 (26th-29th Feb + 1st-5th Mar)
366/365	Indicates 365 days per year. When counting days between two dates, for example, the system counts 31 days for January, 29 days for February in a leap year, and 28 days for February in a non-leap year.	(0.08/365)* P	9 (26th-29th Feb + 1st-5th Mar)
Actual/360	Indicates the actual number of days in a month, but the year is assumed to have 360 days.	(0.08/360)* P	9 (26th-29th Feb + 1st-5th Mar)

Interest Period Calculation

This option is set at the Product and is inherited to the Contracts. The Include Start Date option works only for the Actual 366 days option.

Note:

Earlier the option Include Start Date was called Include From Date. The name change to Include Start Date was brought in the Lynx release of CL Loan.

Example:

If a loan is disbursed on Jan 1st, and the payment is made on January 15th, and ...

If None is selected, then the interest is calculated for 14 days.
If Include Start Date is selected, then the interest is calculated for 15 days.