Interest in Advance

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Interest in Advance

Overview

With the Lithium release, CL Loan enables you to calculate interest in advance.

The interest in advance is calculated according to the repayment schedule frequency. If the repayment schedule is monthly, the interest is calculated for one month in advance and is due at the beginning of the month before the interest starts accruing. The system creates an interest posting transaction on the start date of the schedule. Every interest posting captures interest of the next cycle.

Note:

The calculation of interest in advance is currently not enabled for equated installment loans. It is only enabled for equated principal type of loans.

Key Parameters Affected

When a loan is enabled for calculating interest in advance, the key parameters affected are as follows: 

Disbursements

  • On the first disbursal, an IPT is created and the interest posted is calculated from the accrual start date to the first payment date.

  • The payment for the first IPT is satisfied if the Collect Advance Interest On Disbursal flag is true. For example, if $5000 is to be disbursed and advance interest calculated is $41.67, then $4,958.33 is disbursed to the borrower.

  • Further disbursals do not create IPTs.

  • Reversal of the first disbursal discards the first IPT only.

  • Reversal of subsequent disbursal marks the IPTs unpaid if they were paid.

Payments

  • The interest portion of all the payments made satisfies only the interest that is posted till the payment date. 

  • Payoff and payoff quote consider only interest posted. Other components such as interest accrued and interest remaining are not considered.

Billing

  • Bills are equal to EMI amount as usual. 

  • First bill is generated only at the end of the first interest posting cycle, and not at the beginning of the interest posting cycle.

  • For the first bill, unpaid IPT amount is added to the bill, and hence the bill amount increases.

Interest Posting and Capitalization

  • Interest in advance works only for IPT enabled products.

  • Interest posting frequency must be equal to Billing Frequency. 

  • Interest posted is from the current posting date to the next posting date.

  • Balance on which it is calculated is the expected opening balance as per schedule.

  • Principal posted remains unaffected.

  • The first IPT is posted when the loan amount is first disbursed.

Rescheduling

  • Loans with interest in advance can be rescheduled manually or automatically. The reschedule starts from the next interest posting cycle.

  • The effects of rescheduling are seen only after the current posting cycle is passed.

  • Rate Change or Floating Rate Change: Any rate changes between the IPT cycles lead to the change in the current interest rate. IPT already posted till a future date remains as is. This means that the current IPT is calculated using the old interest rate, whereas the next IPT is calculated using the new interest rate.

  • Payment date change or Due Day change: Example:

    You may refer to the example on calculating interest in advance before you look at the following example for better understanding.

    Let us say that on May 1, 2012, due day is changed to 15th of every month. This comes into effect from June 1. New schedules are generated as shown in the following table:

    Due Date Advance Interest Principal Installment Amount Opening Principal Balance Closing Principal Balance
    March 1, 2020 $41.67 $0 $41.67 $5,000.00 $5,000.00
    April 1, 2020 $34.72 $833.33 $868.05 $5,000.00 $4,166.67
    May 1, 2020 $27.78 $833.33 $861.11 $4,166.67 $3,333.34
    June 1, 2020 $9.72 $833.33 $843.05 $3,333.34 $2,500.01
    June 15, 2020 $13.89 $833.33 $847.22 $2,500.01 $1,666.68
    July 15, 2020 $6.94 $833.33 $840.27 $1,666.68 $833.35
    Aug 15, 2020 $0.00 $833.35 $833.35 $833.35 $0.00

    • May 15 schedule is not present. This is because advance interest is already posted till June 1. You cannot have the next payment date as May 15. You can have any date after June 1, that is, after the current posting cycle.

    • Newly created schedules are from June 1.

    • On June 1, interest is posted till June 15.

    • Rescheduling on the last month does not generate any schedules.

  • Flexible Repayment Plan: Flexible repayment plan can have their Payment Start Date only after the current posting cycle.

  • Principal Adjustments or Excess threshold: Schedules after current posting cycle are regenerated.

Interest Waiver

  • Only the posted interest can be waived.

WriteOff

  • Only the posted interest is charged off.

Accrual Transaction

  • The formula for Accrual entry for advance interest is calculated as follows:

(Interest posted for IPT cycles passed + Interest Remaining + Interest accrued from LAD till date) - Accrual Amount Accounted For.

Minimum Interest Amount

  • The minimum Interest is calculated based on the Interest Paid and Interest Posted. Interest Accrued and the Interest Remaining are not considered for this calculation.

Not supported

The following functions are not supported when advance interest is enabled:

  • Adjustment Interest Entry

  • Block Code

  • Holiday Schedule

Charge an Interest in Advance

Prerequisites

Before charging an advance interest on a loan, ensure that the following prerequisite is met:

  • Enable the Loan Disbursal flag in Custom Settings > Transaction Approval Config.

    Note:

    For more information on Transaction Approval Config, see Defining Transaction Approval Configuration section in the CL Loan Administration Guide.

Steps

  1. Log in to your Salesforce account.

  2. Click the App Launcher .

  3. Search for CL Loan, and then click it.

  4. Create a lending product.

  5. While creating the lending product, specify the details as explained in the following table:

    Field Name Action and Information
    Is Interest Posting Transaction Enabled Select this check box to enable the Interest Posting to be able to calculate interest in advance.
    Repayment Procedure

    Select the Equated Principal option for loans to have the installment amount where the principal amount remains constant each month.
    Interest Posting Frequency

    Select the Billing Frequency option to calculate interest at the billing frequency of the loan contract.

  6. After creating the lending product, click Edit Additional Parameters.

  7. In the Additional Parameters section, specify the details as explained in the following table, and then click Save:

    Field Name Action and Information
    Advance Interest Select this check box to enable the calculation of interest in advance.
    Collect Advance Interest On Disbursal Select this check box if the advance interest is to be collected at the time of disbursal.

  8. Create a loan contract from the lending product that you created in the previous steps. 

  9. If the details in the lending product are not specified, while creating the contract, you can specify them as follows:

    Field Name Action and Information
    Is Interest Posting Select this check box to enable the Interest Posting to calculate interest in advance.
    Repayment Procedure Select the Equated Principal option for loans to have the installment amount where principal amount remains constant each month.
    Interest Posting Frequency Select the Billing Frequency option to calculate interest at the billing frequency of the loan contract.
    Advance Interest Select this check box to enable the calculation of interest in advance.
    Collect Advance Interest On Disbursal Select this check box if advance interest is to be collected at the time of disbursal.

  10. Make a disbursement. Interest is calculated and charged as soon as a disbursement is made.

Example: Calculating Interest in Advance

Contract Details

Let's say we have a contract with the following terms and conditions:

Field Name Value
Loan Amount 50,000
Advance Interest flag True
Contract Start Date March 1, 2020
Disbursal Amount 5,000
Disbursal Date March 1, 2020
Interest Rate 10
Terms 6
Frequency Monthly
Time Counting Method Month and Days
First Payment Date April 1, 2020

Repayment Schedule

The repayment schedules are created with the interest due date being in advance. 

On disbursal, the repayment schedule is generated as follows:

A illustrated in the Amortization Schedule image, the final installment does not have any interest due as it has been taken care of as a part of the penultimate repayment schedule.

The repayment schedule is explained as follows:

  • The first schedule has interest calculated till April 1, 2020. The principal amount is zero.

  • The interest component of the subsequent schedule is calculated on the closing balance of the current schedule.

  • The interest component of the last schedule is already captured by last but one schedule, and hence it is zero.

  • Even though the payment start date is April 1, 2020, schedules start from March 1, 2020 to show that interest is calculated from the start of the contract. It can be paid at the time of the disbursement when the value of the Collect Advance Interest as part of Disbursal flag is true, or by loan payments.

  • Bill is not charged on March 1, 2020.

Calculations

The following table depicts the calculations for the repayment schedule:

Due Date = March 1, 2020
Advance Interest Posted 41.67
Principal Due 0
Installment Amount 41.67
Opening Principal Balance 5,000
Closing Principal Balance 5,000
Bill Due Amount Bill is not yet generated.
Calculations

  • Interest is calculated and posted on March 1, 2020 as soon as the loan amount is disbursed for the upcoming cycle from the disbursal date to the next interest posting date.

  • Advance Interest = 5,000 * (10/100) * (30/360) = 41.67

  • Bill is not yet generated.

  • This advance interest is still not paid.
Due Date = April 1, 2020
Advance Interest Posted 34.72
Principal Due 833.33
Installment Amount 833.33 + 34.72 = 868.05
Opening Principal Balance 5,000
Closing Principal Balance 5,000 - 833.33 = 4,166.67
Bill Due Amount 868.05 + 41.67 = 909.72
Calculations

  • Advance interest is calculated from the current interest posting date, April 1, 2020, to the next interest posting date, May 1, 2020.

  • It is calculated on the balance amount, which is the amount remaining after paying the due principal amount of $833.33. The balance amount on which this advance interest is calculated = $5,000 – $833.33 = $4,166.67.

  • Advance interest = 4,166.67 * (10/100) * (30/360) = 34.72.

  • Current due amount to be paid = 833.33 + 34.72 = 868.05.

  • So the first bill that is generated has a due amount = the current due amount + the previous cycle’s amount = 868.05 + 41.67 = 909.72.

  • This happens only with the first bill as the advance interest at the time of disbursal was not collected.

  • The next bills have the expected due amount = due principal + due interest as seen in the repayment schedule.
Due Date = May 1, 2020
Advance Interest Posted 27.78
Principal Due 833.33
Installment Amount 833.33 + 27.78 = 861.11
Opening Principal Balance 4,166.67
Closing Principal Balance 4,166.67 - 833.33 = 3,333.34
Bill Due Amount 861.11
Calculations

  • Third IPT is posted with due amount = $861.11 as per the schedule.
Due Date = June 1, 2020
Advance Interest Posted 20.83
Principal Due 833.33
Installment Amount 833.33 + 20.83 = 854.16
Opening Principal Balance 3,333.34
Closing Principal Balance 3,333.34 - 833.33 = 2,500.01
Bill Due Amount 854.16
Calculations

  • Fourth IPT is posted with due amount = $854.16 as per the schedule.
Due Date = July 1, 2020
Advance Interest Posted 13.89
Principal Due 833.33
Installment Amount 833.33 + 13.89 = 847.22
Opening Principal Balance 2,500.01
Closing Principal Balance 2,500.01 - 833.33 = 1,666.68
Bill Due Amount 847.22
Calculations

  • Balance = 2,500.01 - 833.33 = 1,666.68.

  • Advance Interest calculated for the upcoming cycle = 1,666.68 * (10/100) * (30/360) = 13.89.

  • Due Amount =  833.33 + 13.89  = 847.22.
Due Date = August 1, 2020
Advance Interest Posted 6.94
Principal Due 833.33
Installment Amount 833.33 + 6.94 = 840.27
Opening Principal Balance 1,666.68
Closing Principal Balance 1,666.68 - 833.33 = 833.35
Bill Due Amount 840.27
Calculations

  • Balance = 1,666.68 - 833.33 = 833.35.

  • Advance Interest calculated for the upcoming cycle = 833.35 * (10/100) * (30/360) = 6.94.

  • Due Amount =  833.33 + 6.94 = 840.27.
Due Date = September 1, 2020
Advance Interest Posted 0.00
Principal Due 833.35
Installment Amount 833.35 + 0.00 = 833.35
Opening Principal Balance 833.35
Closing Principal Balance 833.35 - 833.33 = 0
Bill Due Amount 833.35
Calculations

  • Advance Interest is zero as there is no upcoming cycle.

  • Balance on which the advance interest is calculated is the amount remaining after paying the due principal amount of $833.33. In this case, the balance amount = 833.35 - 833.33 = 0, and hence the advance interest is also zero.

  • Due Amount = 833.35 + 0 = 833.35.

Example: Calculating and Collecting Advance on Disbursal

Contract Details

Let's consider a contract with the following details:

Field Name Value
Loan Amount $50,000
Advance Interest True
Collect Advance on Disbursal True
Contract Start Date March 1, 2020
Disbursal Amount $10,000
Disbursal Date March 1, 2020

Disbursal Transaction

Let us say we disburse an amount of $5,000.

While making a disbursement, the interest is collected in advance and withheld from the total amount being disbursed as depicted in the following image:

The key fields of the preceding Loan Disbursal Transaction image are explained in the following table:

Field Name Information
Financed Amount This is the actual amount funded after deducting the Advance Interest amount.
Advance Interest

This is the interest calculated in advance.

Advance Interest = 5000 * (10/100) * (30/360) = $41.67.
Transaction Amount

This is the amount to be disbursed.

Note:

If you change the Transaction Amount, you must click Regenerate Distributions to regenerate the corresponding Distribution Amounts.
Transaction Date This is the date at which the disbursal is made.
DISTRIBUTION TYPE This is how the disbursal is distributed amongst various types.  

  • Here, on disbursement of $5000, two Distributions Types are created as follows:

    • Interest: This is the advance interest calculated, and to be collected as part of the disbursement.

    • Disbursement: This is the amount actually disbursed after deducting the Advance Interest from the Transaction Amount to be disbursed.
DISTRIBUTION AMOUNT

This is the amount that shows how the total Transaction Amount to be disbursed is divided.

Here, the two distribution amounts are as follows:

  • Advance Interest = $41.67.

  • Actual amount disbursed = 5,000-41.67 = $4,958.33.
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