Loan Penalties Setup
  • 26 Oct 2021
  • 5 Minutes To Read
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Loan Penalties Setup

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A penalty is a fee that your organization may charge clients when a specific term of the loan contract is violated. Penalties are applied after the arrears and penalty tolerance period has passed, but are calculated from the due date.

Penalty calculation methods

In Mambu the penalties are applied automatically when an installment is in arrears. The penalties are being computed based on the calculation methods explained below:

Option Description
No penalty Won't charge penalties when a repayment is late
Overdue Principal * Number of Late Days * Penalty Rate The most common method, where the penalty rate is applied on the principal due late amount and the number of late days.
(Overdue Principal + Overdue Interest) * Number of Late Days * Penalty Rate This method is similar to the previous one, but includes the overdue interest in the calculation.
Outstanding Principal * Number of Late Days * Penalty Rate This method mirrors adding a penalty interest rate on top of the usual interest rate.
Please Note
Arrears settings control how a loan's days in arrears should be calculated. These settings affect anything that is derived from a loan's days in arrears, such as penalties. For more info, please see Arrears Settings.

Penalty tolerance period

The Penalty tolerance period is the number of days before which no penalties will be applied to an account even if there is a late repayment.

Delaying the application of the penalty means that no penalties will be applied for the number of days defined in the Penalties Settings section of the Creating a new loan product form. After the penalty tolerance period is over, penalties will be applied on the basis of overdue principal balance and the number of days late.

Examples with the Penalty Calculation Method
Overdue Principal * Number of Late Days * Penalty Rate

Arrears tolerance period Penalty tolerance period Days late Penalty is applied
Example 1 32 days 40 days 34 days
Example 2 32 days 40 days 41 days
Example 3 40 days 32 days 34 days
Example 4 40 days 32 days 41 days

Example 1

Arrears Tolerance Period: 32 days
Penalty Tolerance Period: 40 days
Account 34 days late (2 days in arrears)

The penalty is not applied yet, because the penalty tolerance period is still ongoing.

Example 2

Arrears Tolerance Period: 32 days
Penalty Tolerance Period: 40 days
Account 41 days late (9 days in arrears)

The penalty is applied, and is calculated based on the number of days late (41).

Example 3

Arrears Tolerance Period: 40 days
Penalty Tolerance Period: 32 days
Account 34 days late

The installment is within the Arrears Tolerance Period, so there are no penalties applied.

Example 4

Arrears Tolerance Period: 40 days
Penalty Tolerance Period: 32 days
Account 41 days late (1 day in arrears)

The penalty is applied, and is calculated based on the number of days late (41).

Penalty rate

When setting up a loan product, in the Penalties Settings section of the form, enter the rate you want to apply as penalty. You can either define a default, a minimum, a maximum rate or all of them.

For the two methodologies where the penalties are calculated on the Overdue Principal, the penalty rate you define is a daily penalty rate.

Please be Aware
If you're using a monthly penalty rate, for instance, you can simply divide your current rate by 30 to obtain the daily penalty rate.

When the penalties are calculated on the Outstanding Principal, the penalty rate frequency always follows the interest rate frequency (for example, if the interest rate of a product is 30% per year, the penalty rate frequency for all the accounts created under this product can only be a yearly one).

Penalty accrual and application

All the penalties in Mambu are accrued on a daily basis. The main difference is that for the methodologies where the penalties are calculated on the Overdue Principal, there will be a daily interest application transaction posted to the loan account, while for the Outstanding principal methodology the penalty is accrued daily but the accumulated amount will be applied to the account, along with the interest accrued amount based on the product settings. For example, when the interest accrued amount is applied (either manually or automatically) or when a repayment is posted.

Accrued overdue penalties

With this feature enabled, penalties are accrued daily and applied nightly, at cron jobs. The Accrued Overdue Penalties will be displayed at account level but if the balance of the accrued overdue penalty is 0, then they will not be displayed.

Accrued outstanding penalties

Penalties are accrued daily and applied when you chose to apply them in the product settings.

Notes
  • If penalties are enabled for a loan product, the penalty rate can be defined individually per loan account (When viewing the loan account details, click on More > Edit Penalty Rate).
  • For loan products where the “Interest Rate Type” is “None” and penalties are calculated on Outstanding Balance, the default penalty charge frequency is % per year.
  • Changing the penalties settings for an existing loan product with active accounts will affect only newly created accounts. For the existing ones penalties will keep being calculated with the methodology that was enabled when the accounts were created.

Reversal or adjustment

When you reverse penalty accrued amounts in Mambu, they will be recalculated with the next cron job update. You can also backdate transactions for reversed penalties and they will be recomputed. In that case, if the recomputed amount is 0, penalty transactions are not reapplied.


Edit schedule

In Mambu you have an option to change the due date of repayments, meaning the number of days late can be increased or decreased. Holidays and Non-working days are excluded when computing the penalty accrued amount, if requested by product settings. Under Edit Schedule, you can update the penalty accrued amount when the number of days late is changed.

Please Note
It will not be possible to edit an installment, if a penalty applied transaction has been made on or after its due date.

Lock account

If the account is locked, the penalty amount will still be accrued, but it will not be applied. The penalty amount will be applied when the account is unlocked again.


Change rate

At change rate, the penalty accrued amount will be recalculated and updated with the new penalty rate.


Closure

At closure the penalty accrued amount will be applied automatically.


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