EOD Interest Accrual
What is EOD Interest Accrual?
The End Of the Day (EOD) accrual is a process in which the system accrues interest at the end of the day on the closing outstanding principal balance of the day in the EOD process.
Why is it required?
In the normal scenario, the interest accrued till the current system date is calculated at the SOD of the next day on the opening balance. However, if you want to see the interest on the same day, this calculation does not help. Also, this approach ignores any disbursements and repayments done on any given day for that day’s accruals. This also means that any accruals of the last day of the month are posted to the next month due to which, in the accounting terms, income is posted to the wrong accounting period.
To address this issue, Q2 Loan Servicing has been enhanced to provide you with an option to configure the interest accruals to be part of the EOD batch process so that the system can accrue interest for one day based on the closing balance of the day.
This aids in recognition of the income earlier on the same day and sending out accounting reports on the same day, including the same day's interest, instead of waiting for the next day.
For example, if any transaction on the loan occurs today, such as a repayment or a rate change, then the interest accrual is calculated today itself at the end of the day on the new balance.
How do we enable it in the org?
Specify EOD in the Custom Settings > Org Parameters > Daily Interest Accrual Time.
If nothing is specified in the Daily Interest Accrual Time, then the default value is SOD, which is the normal scenario of interest accrual at the beginning of the day in the SOD process.
For more information on Org Parameters of the Custom Settings, see Defining Org Parameters section in the Q2 Loan Servicing Administration Guide.
Key Concepts
The system allows you to define at the org level if the interest accrual should be a part of the SOD batch or the EOD batch.
If the user chooses interest accrual to be an EOD batch, then the interest accrual for that day occurs on the actual outstanding balance after all the transactions recorded on that day.
If there is a subsequent disbursement taking place during the lifecycle of a loan, the interest on the extra principal gets accrued and recognized on the same day. This works as a benefit to the lender in terms of accounting or reporting.
If there is a repayment taking place on a particular day, the interest gets accrued on the reduced outstanding balance for that day. This works as a benefit to the customer.
If the billing date is on a month-end date like 31, and the accrual process is EOD, then the billing amount also includes the one day's interest accrual amount of 31.
If there is a rate reset happening on the billing date like on 31, then there is one day of interest accrued as per the new rate in the billing amount.
The interest posting and capitalization batch runs at the end of the day. For more information on Interest Posting Job as EOD process, see Interest Posting Job to be an EOD Process section.
The payoff is a part of the SOD job and behaves normally like in the default SOD process.
What is the default behavior of the system? or How does the system behave currently?
The interest accrual is a Start of Day process configurable in Q2 Loan Servicing.
Interest accrual: The interest gets accrued at the beginning of the day for an interest amount till the previous date, which means that if the interest accrual process runs on June 5 SOD, it would accrue interest calculated till June 4.
Interest capitalization: Similarly the interest posting job (which does capitalization of interest) is a SOD job in CL Loan, and capitalizes the interest amount accrued till the previous day.
Additional Interest: The non-utilization fee configured as Additional Interest Component gets accrued along with the interest accrual process in the system.
What is new?
A new configuration is introduced in the Org Parameters of Custom Settings called Daily Interest Accrual Time.
The field Daily Interest Accrual Time could be set to SOD or EOD depending on when the accrual is recorded in business for the lender.
If the Daily Interest Accrual Time is set to EOD:
Q2 Loan Servicing creates a separate DAG for the Accrual Entry job that would run at the end of the day.
Interest accrual: The interest gets accrued at end of the day on the closing balance of the loan.
Accounting entry: The accounting entry configured for the interest accrual occurs on the same day. For example, accounting entry for June 5 occurs on June 5 itself, unlike the default scenario where accounting entry for the June 4 accrual occurs on June 5.
Additional interest: The non-utilization fee, configured as Additional Interest Component, gets accrued at the end of the day on the day's closing balance with the corresponding accounting taken care of as well on the same day.
Payment and backdated payment: The normal payment behaves in the same way as before. However, if a backdated payment is made before an IPT date, the system discards and recreates the IPT after the payment on the same date. Similar behavior is seen when a backdated reversal takes place.
What is the difference in interest calculated when Daily Interest Accrual Time is SOD and EOD?
Let us say the system has to calculate interest from a particular Start Date to an End Date. In the default scenario where interest is accrued is at the beginning of the day, the interest calculation then starts from the Start Date including the Start Date until the day before the End Date in the schedule. This means that the total accrued interest as of today is calculated until yesterday.
This also means that the interest due that you would pay today is the interest calculated till yesterday in both SOD and EOD because SOD calculates the interest till yesterday at the start of today and EOD calculates the interest till yesterday at the end of the day yesterday (as today is not yet over so today's interest would not yet be calculated).
There is a difference in considering the number of days for a payment that occurs on a particular date and the number of days for an end-of-day accrual calculation that occurs on that date.
For example, say January 01, 2020, is the Start Date and January 06, 2020, is the End Date, then:
| Daily Interest Accrual Time | Start Date or Contract Start Date | End Date or First Payment Date | Number of days considered for interest calculation on First Payment Date |
|---|---|---|---|
| SOD and EOD | January 01, 2020 | January 06, 2020 | 5 Note: Interest is calculated for January 1, January 2, January 3, January 4, and January 5 on January 6, which is not yet over. Thus, the number of days considered for interest calculation does not change whether it is EOD or SOD. |
| Daily Interest Accrual Time | Start Date | End Date | Number of days considered for interest calculation till the end of the End Date |
| SOD | January 01, 2020 | January 06, 2020 | 5 Note: Interest is calculated for January 1, January 2, January 3, January 4, and January 5 as of January 6. Here, interest for January 1 is calculated on January 2 SOD, interest for January 2 is calculated on January 3, and so on. |
| EOD | January 01, 2020 | January 06, 2020 | 6 Note: EOD calculation includes interest calculated for the same day January 6. Here, interest for January 1 is calculated at the end of January 1 itself, interest for January 2 is calculated at the end of January 2, and so on. |
For more information on Time Counting Method, see the Interest Calculation section.
Thus, the system seems to behave in the same way even when the Daily Interest Accrual Time is EOD, however, the calculation differs when the Time Counting Method is chosen as Actual Days 366 where if the dates fall on a leap year, the system considers the number of days in a year as 366 days.
To understand this, let us say the system has to calculate interest from December 05, 2019, to January 05, 2020, where January 05 is the payment due date, as illustrated in the following table:
| Start Date | End Date (Payment Due Date) | Time Counting Method |
|---|---|---|
| December 05, 2019 | January 05, 2020 | Actual Days 366 |
Daily Interest Accrual Time = SOD
In the default scenario when the Daily Interest Accrual Time is SOD, the interest calculation by the system is broken down into the following two groups of dates:
| Start Date | End Date | Days for Interest Accrual Calculation | Days in a Year Considered |
|---|---|---|---|
| December 05, 2019 | December 31, 2019 | 26 (from December 05 to December 30) | The system considers 365 days in a year as 2019 is not a leap year |
| December 31, 2019 | January 05, 2020 (Payment Due Date) | 5 (from December 31 to January 04) | The system considers 366 days in a year as 2020 is a leap year |
The interest of December 31 is included in the leap year calculation because the system is calculating the interest of December 31 in the SOD job of January 1.
Daily Interest Accrual Time = EOD
Let us assume the same preceding example where:
| Start Date | End Date (Payment Due Date) | Time Counting Method |
|---|---|---|
| December 05, 2019 | January 05, 2020 | Actual Days 366 |
The interest calculation done by the system is broken down into the following two groups of dates:
| Start Date | End Date | Days for Interest Accrual Calculation | Days in a Year Considered |
|---|---|---|---|
| December 05, 2019 | December 31, 2019 | 27 (from December 05 to December 31) | The system considers 365 days in a year as 2019 is not a leap year |
| January 01, 2020 | January 05, 2020 (Payment Due Date) | 4 (from January 01 to January 04) | The system considers 366 days in a year as 2020 is a leap year |
The interest of December 31 is correctly included in the non-leap year calculation because the system is calculating the interest of December 31 in the EOD of December 31 itself.
What is the order in which the jobs are run?
The order in which the jobs are run in an EOD process is:
Interest Posting Job
Interest Accrual Job
Fee Accrual Job
Is there a custom script to create a custom DAG for the EOD process and how to use it?
If you want the system to accrue interest at the end of the day, then you can use the custom DAG, which is created to include the following two jobs to run at EOD:
Interest Posting Job: This is to ensure that the interest is posted at the end of the day to include all capitalization of that day too. If capitalization occurs at the end of the day on a due date such as 31, then accrual occurs at the end of the day after considering the capitalization on the new balance.
Accrual Entry Job
For more information on creating and using the custom DAG, see the Custom DAG for the EOD Process subsection of this section.
Example: EOD Interest Accrual Calculation
Let us say there is a contract created with the following terms and conditions:
| Daily Interest Accrual Time | EOD |
| Loan Amount | $10,000 |
| Interest Rate | 12 |
| Time Counting Method | Actual Days (366) |
Then the following table explains how the system behaves on each date:
| Date | Principal Remaining | Interest Remaining | Interest Posted | Interest Accrued | Interest Capitalized | Accrual Entry | Balance | Action | Additional Information |
|---|---|---|---|---|---|---|---|---|---|
| March 1, 2019 | $10,000 | 0 | 0 | 0 | - | - | $10,000 | - | - |
| March 31, 2019 | $10,000 | 0.00 | 0.00 | $98.63 Note: Interest Accrued = ($10,000) * (12/100) * (30/365) = 98.63. | 0.00 | $101.92 Note: Accrual Entry = $98.63 + ($10,000 * (12/100) * (1/365)) = 98.63 + 3.29 = 101.92. | Accrual Entry | Accrual Entry is calculated including the interest accrued on March 31, which is calculated in the EOD of March 31. | |
| April 1, 2019 | $10,000 | 0.00 | $101.92 | 0.00 | $101.92 | - | $10101.92 | Interest Posting | Calculating the interest posted until March 31. |
| April 1, 2019 | $10,000 | 0.00 | 0.00 | 0.00 | 0.00 | - | $10,000 | Payment | Interest is paid. |
| April 30, 2019 | $10,000 | 0.00 | 0.00 | $95.34 Note: Interest Accrued = ($10,000 * (12/100) * (29/365)) = 95.34. | 0.00 | $98.63 Note: Accrual Entry = $95.34 + ($10,000 * (12/100) * (1/365)) = 95.34 + 3.29 = 98.63. | $10,000.00 | Accrual Entry | Accrual Entry is calculated including the interest accrued on April 30, which is calculated in the EOD of April 30. |
| May 01, 2019 | $10,000 | 0.00 | $98.63 | 0.00 | $98.63 | - | $10,098.63 | Interest Posting | Calculating the interest posted until April 30. |
| 15-May-19 | $10,000 | 0 | $98.63 | $46.48136548 Note: Interest Accrued = ($10,000 * (12/100) * (14/365)) = 46.48. | $98.63 | - | $10,098.63 |
Example: EOD Interest Calculation Including Both Leap and Non-Leap Years
Let us say the following are the org parameters defined:
| Daily Interest Accrual Time | EOD |
| Current System Date | December 05, 2019 |
Let us say we create a loan with the following terms and conditions:
| Loan Amount | $10,000 |
| Payment Frequency | Monthly |
| Time Counting Method | Actual Days (366) |
| Interest Rate | 12% |
| Is Interest Posting | True |
| Interest Posting Frequency | Monthly |
| Is Capitalization Enabled | True |
Let us disburse $10,000.
Let us say that the accrual entry frequency is monthly, and the Next Accrual Entry Date is December 31, 2019. When the Accrual Entry Job runs at the end of December 31, Accrual Entry of $88.77 gets created for 27 days as per the calculation in the following table:
| Start Date | End Date | Days for Interest Accrual Calculation | Days in a Year Considered | Interest Accrued |
|---|---|---|---|---|
| December 05, 2019 | December 31, 2020 | 27 (from December 05 to December 31) | The system considers 365 days in a year as 2019 is not a leap year | $10,000 * (12/100) * (27/365) = $88.77 |
| January 01, 2020 | January 05, 2020 (First Payment Date) | 4 (from January 01 to January 04) | The system considers 366 days in a year as 2020 is a leap year | $10,000 * (12/100) * (4/366) = $13.11 |
Accrual Entry
Interest Posted and Interest Capitalized is for 27 days(considering 365 days) + 4 days (considering 366 days in a year) = 88.77 + 13.11 = $101.88.
Capitalized amount is then added to the loan balance and so the Loan Balance is updated to ($10,000 + $101.88) = $10101.88.
Interest Posted and Interest Capitalized
What is not supported in the Platinum patch release?
The following functionalities of Q2 Loan Servicing are currently not supported with respect to the EOD interest accrual process:
Advance interest: When you try to charge advance interest, the system uses validations.
Additional interest on the delinquent amount: This can still be used.