The Nearest with carried over Rounding Method
Overview
When Nearest with Carried over rounding method is selected, the amount is rounded off to the nearest 2 decimal digit number, and the difference in the amount after rounding, also called as the Interest Rounding Error is adjusted or carried over to the next amount in the next cycle. Thus, to ensure that the system calculates as accurately as possible, any difference or error that arises due to rounding is adjusted in the next LAD cycle, and this continues till the loan contract has reached its maturity or is closed, after which there may still be some error, but it would be very negligible.
Digits after Decimal specifies the number of digits after decimal that would be used in rounding, and by default, the value is 2.
Interest Rounding Error
Interest Rounding Error is nothing but the difference between the actual amount and the rounded amount. It can be a negative value based on whether it is rounded up or down. If it is rounded up, then the value would be a negative one. This value is then adjusted by adding it to the amount in the next LAD cycle.
Interest Rounding Error is a field of the Loan_Account__c object in CL Loan.
Everytime an LAD is changed, the Interest Remaining gets updated, and the system stores that extra or subtractive value, due to rounding, in this field called the Interest Rounding Error. Thus, this field helps in keeping track of the interest rounding error at each event that changes the LAD of the loan. It is used to adjust the rounded value of the Interest Accrued Not Due.
Interest Rounding Error = Actual amount - Rounded amount.
For example, let us say the actual Interest Accrued is $27.39726. After rounding, the Interest Accrued is $27.40. This means that the interest is rounded up. In this case, the Interest Rounding Error is calculated as $27.39726 - $27.40 = - 0.00274, which is a negative value. However, say if the actual Interest Accrued was $27.3333334, then after rounding, the Interest Accrued becomes $27.33, which means it is rounded down. In this case, the Interest Rounding Error would be: $27.3333334 - $27.33 = 0.0033334. Now, on the next day, the value of the Interest Rounding Error is adjusted by adding it to the actual Interest Accrued for that one day.
Example: Nearest with carried over
Let us understand how the Nearest with carried over rounding method works with the help of an example.
Let us say a lending product is created with the following details:
| Field | Value |
|---|---|
| Rounding Method | Nearest with carried over |
| Digits After Decimal | 2 |
Let us say a contract is created with the following terms and conditions:
| Field | Value |
|---|---|
| Principal | $10,000 |
| Interest Rate | 10% |
| Time Counting Method | Month and Days |
| Application Date | January 05, 2019 |
| Current System Date | January 15, 2019 |
Interest Accrual Rounding
Let us calculate the interest accrued from January 15 to January 05, which is 10 days.
Interest Accrued = Principal * Rate * Number of Days as per the Time Counting Method = $10,000 * (10/100) * (10/360) = $27.77777778
Interest Accrued after rounding = $27.78.
Rounding When LAD is Changed
Let us understand how Nearest with carried over works when the LAD changes.
LAD Change Event: Payment
Now let's say we make a payment and the payment is Interest Only.
The following table illustrates the flow of events and the calculations that take place when a payment is made:
| Date | Payment | LAD | Actual Interest Accrued | Rounded Interest Accrued | Interest Remaining | Interest Rounding Error |
|---|---|---|---|---|---|---|
| January 15 | $27.78 | January 15 | $27.77777778 | $27.78 | 0 | $27.77777778 - $27.78 = - 0.00222222 |
| January 16 | $2.77777778 + (-0.00222222) = $2.77555556 | $2.78 | $2.77555556 - $2.78 = -0.00444444 |
We observe the following:
On making a payment on January 15, the LAD changes to January 15, and the actual Interest Accrued calculated for 10 days till January 15 is $10,000 * (10/100) * (10/360) = $27.77777778.
The actual Interest Accrued is rounded up to the nearest value with 2 decimal digits as: $27.78.
Interest Remaining is zero as there was no LAD change before this.
The Interest Rounding Error is calculated as actual Interest Accrued - rounded Interest Accrued = $27.77777778 - $27.78 = -0.00222222.
On the next day, January 16, the difference or the Interest Rounding error is carried over to the actual Interest Accrued calculated for January 16. This means that the rounding error is adjusted while calculating the Interest Accrued.
Hence, the actual Interest Accrued = Interest Accrued for one day + Interest Rounding Error = $2.77777778 + (-0.00222222) = $2.77555556.
The actual Interest Accrued for January 16 is then rounded to $2.78.
The Interest Rounding Error now gets updated to the following new value = actual Interest Accrued - rounded Interest Accrued = $2.77555556 - $2.78 = -0.00444444.
Now, say, instead of $27.78, a payment of $26 is made on January 15, then:
| Date | Payment | LAD | Actual Interest Accrued | Rounded Interest Accrued | Interest Remaining | Interest Rounding Error |
|---|---|---|---|---|---|---|
| January 15 | $26 | January 15 | $27.77777778 | $27.78 | $27.78 - $26 = $1.78 | Actual Interest Remaining Before Rounding - Rounded Interest Remaining= (27.77777778 - 26) - 1.78 = -0.00222222. |
We observe the following:
On making a payment of $26 on January 15, the LAD changes to January 15, and the actual Interest Accrued calculated for 10 days till January 15 is $10,000 * (10/100) * (10/360) = $27.77777778.
The actual Interest Accrued is rounded up to the nearest value with 2 decimal digits as: $27.78.
The Interest Remaining is updated to the following value: rounded Interest Accrued - Payment = $27.78 - $26 = $1.78.
Now because the Interest Remaining is updated, the Interest Rounding Error also gets updated as follows: actual Interest Remaining before rounding of the actual Interest accrued - rounded Interest Remaining= (27.77777778 - 26) - 1.78 = -0.00222222. This means that when ever the Interest Remaining is updated, the Interest Rounding Error also gets updated.