Equal Installment Interest-Only Loans

To learn more about the various configuration options when setting up this loan type, refer to Configuring an Equal Installment Interest-Only Loan.

Overview

Interest-only equal instalment loans have interest-only repayments. No principal is allocated on the repayments schedule; instead, the principal is kept in the Principal Balance at the account details level. At the end of the term it would be expected that the capital/principal balance is repaid. The principal balance can also be repaid through custom repayments throughout the loan lifecycle, generating a decrease in the subsequent total due.

A loan of this type will have equal total due instalments regardless of the length of the period, so each monthly repayment will be the same amount. The monthly total due is calculated as if all instalments have the same number of days.

The real interest accrued amounts will be reflected in the interest accrued balance and at the schedule level, generating a difference in the closing balances of each instalment. The example below is created based on a loan with day count method = Actual 365 where the instalment duration varies based on the actual number of days in the interval and the total due is calculated using the formula:

PMT = ((interest rate/12), NPER, PV, FV , Type (0))

Where:

• PMT: The monthly payment.
• Interest rate: The required loan interest rate.
• NPER: The required total number of payments for the loan.
• PV: The principal value at disbursement date disbursed present value.
• FV: The principal value at the close of the loan. In the case of interest-only loans the FV would be equal to the PV.
• Type: The optional type. Set type equal to 0 or omitted for payments due at end of period.

Example

Loan amount: 150000
Interest rate: 10%/year
Number of instalments: 5
Disbursement date: 01/01/2023
First repayment due date: 01/02/2023
Total due: 1250

Instalment 1 (01/01/2023 until 01/02/2023):

• Interest accrued = 150,00010%/36531 days = 1273.97
• Total expected = 1250
• The customer will pay less interest than accrued so the difference of 23.97 will remain unpaid in the interest balance.

Instalment 2 (01/02/2023 until 01/03/2023):

• Interest accrued = (150000+1273.97-1250) * 10%/365 * 28 days = 1150.87
  Where (150000+1273.97-1250) = 150023.97 (closing balance after the repayment of instalment 1)
• Total expected = 1250
• The customer will pay more interest than accrued, therefore the interest balance will become negative.
• Previous interest balance = 23.97
• Interest balance after interest application on instalment 2 = 23.97+1150.87 = 1174.84
• Interest balance after repayment of instalment 2 = 1174.84 -1250 = -75.16

Pre-payments and over-payments

For more information, see Prepayment Recalculation Methods.

• Pre-payment: An amount paid in advance which is smaller than the installment Total Due.
• Over-payment: An amount paid in advance which is bigger than the installment Total Due.

Allocation logic

Repayments can be made in the following ways:

• In the principal balance via custom repayments.
  • A pre-payment or over-payment will be allocated exclusively in the Principal Balance.
  • The upcoming installment remains unpaid and will be settled with the next regular repayment.
• On the upcoming pending installment via regular repayments.
  • If a pre-payment for a future installment is made, it will be allocated to settle the total expected amount of that installment and the remaining amount, if any, will be allocated to the principal balance.
  • When the pre-payment amount is less than the Total Due, the pre-payment will be allocated to the upcoming installment, and will go towards partially settling it. If then the customer makes a repayment for the upcoming installment, any excess in this will be classed as an over-payment and allocated to the capital balance.
• After the over-payment, the expected closing balance is updated with the actual closing balance at the schedule level; hence, the subsequent expected interest accrued installments will be re-calculated.
• In the case of an over-payment that decreases the principal balance, a new PMT is computed for the remaining installments, as per the reduce amount per installment pre-payment recalculation method.

Interest-only schedules

On interest-only equal installment loans, the schedule has the following characteristics:

• No principal is allocated or displayed on the schedule.
  • Hence, the Principal Expected, Principal Paid, and Principal Due columns are not shown on the schedule.
• The Expected Amounts area has two new columns: Closing Balance Expected and Interest Accrued Expected.
• Closing Balance Expected: Shows the expected closing balance of each installment with the assumption that the installments are paid on time. Any deviation from this rule will update the expected closing balance with the actual closing balance.
  • Closing balance expected is calculated as:

  Closing Balance Expected = Previous Closing Balance + Interest Accrued Expected - Total expected
  

  • In case of deviations from the rule, the closing balance expected at the schedule level will be updated to match the principal balance + interest balance (actual closing balance) from the account details level.
  • Closing balance expected is then updated with the actual closing balance in certain cases of late repayments and over-payments.
  • Closing balance expected is not updated in the following cases:
    • When interest is applied in the due date and all previous installments are paid.
    • When repayment is received in the installment due date.
  • These are on time events that do not alter the expected balances, so there is no need to update them.
• Interest Accrued Expected: Calculates the actual interest accrued for an installment.
  • Interest accrued expected is calculated as:

   Interest Accrued Expected = Closing Balance Expected * IR%/ Days in year * Number of days in interval 
  

Do not accrue late interest option

When Do not accrue late interest is enabled at the product level, the closing balance expected will not be updated in the case of late repayments. The subsequent interest computations are done based on the closing balance expected throughout the entire loan lifecycle, except for the scenarios when the principal balance is decreased with over-payments.

Broken interest

Broken Interest refers to the total due computation when the duration of the first installment is smaller or bigger than the interval.

• In the case of a higher period (more than one month) between the disbursement and first repayment date, the first installment due amount is going to be higher than the rest of the installments.
  • The broken interest calculation in this case is as follows:

  First installment total due = Total Due + actual interest calculated for the additional number of days. 
  

• In the case of a smaller period (less than one month) between the disbursement and first repayment date, the first installment due amount is going to be smaller than the rest of the installments.
  • The broken interest calculation in this case is as follows:

  First installment total due = actual interest calculated for the number of days between the disbursement and the first repayment date. 
  

Payment holidays

Interest only loans support payment holidays without increasing the loan term. When an installment is marked as a payment holiday its total due becomes 0 (it is marked as grace).

The total due for the remaining installments is then recalculated and is reflected starting with the upcoming installment (no matter how many days in advance a payment holiday has been added on the schedule).

The interest for payment holidays is accrued in the payment holidays interest accrued balance, and is applied on the account automatically by the cron job in the payment holiday installment due date. Once applied, the payment holiday interest becomes regular interest and is added up in the Interest Balance along the regular interest.

When the borrower resumes the payments, the payments will decrease the Interest Balance covering both the regular and payment holiday interest at the same time.