Payment Methods for DBEI Loans
- Updated On 14 Feb 2020
- 4 Minutes To Read
For both dynamic and fixed term loans you can chose an interest calculation method based on a declining balance with the borrower paying the loan down in equal installments. This type of loan allows a few different payment methods which will have an impact on the payment schedule for this loan.
A standard payment method simply divides the total amount due (including interest) by the number of installments to be made to pay down the loan. If it is not possible to divide cleanly and rounding has been enabled for this product, the last payment may be slightly smaller or larger than the previous installments although this is generally only a few cents.
When rounding has not been enabled for the product and the principle can not be cleanly divided you will receive a warning, giving you the option of changing one or more settings to ensure collection of the entire amount.
This payment method is available for both fixed and dynamic term loan products.
This option is also available for both fixed and dynamic term products and allows you to offer borrowers a fixed repayment amount each month with the balance of the loan to be paid off with the final installment, which could be a lot higher. These kinds of loans are typically targeted at businesses as the large final payment to settle the loan may be beyond the reach of a normal consumer.
When you create a loan based on this product you will be able to set the monthly payment amount and Mambu will calculate the schedule. For dynamic loans, the schedule, including the amount for the final payment will be recalculated based on any overpayments made by the borrower.
example showing balloon payment making interest only payments and settling the whole loan with a large lump sum at the end
example showing balloon payment schedule paying down interest and some of the principle with the final payment being around half of what was initially lent to the customer
There are cases in which organizations may want to offer accounts with a defined payment plan, meaning that they would specify a periodic payment for a specific number of installments with rates being able to rise or fall with subsequent installments.
Products in which the interest rate changes throughout the life of the loan:
- the interest rate is reduced by 10% each year, or
- a 10% interest rate is used for the first 3 months of the loan, and after this period the interest rate will decrease to 8% and continues with this rate until the loan reaches maturity.
- Product Definition
The Payment Plan can be configured only for Fixed Term Loans with Declining Balance (Equal Instalment) interest calculation method.
- Loan Account Definition
In the below image we have the loan account definition with two payment amounts for a specific number of installments:
→ 200 $ for installments from 1 to 12, and
→ 80 $ for installments from 13 to 15.
The interest rate is computed based on the IRR formula.
- Loan Account Schedule
In the below image we have illustrated the schedule for the Loan Account defined in the example above.
Loans with large differences in number of days between payments have equal installment dues, but the last installment is usually adjusted with the difference that comes from the irregular payment intervals, in some cases making it considerably larger than the rest.
Mambu has an option for equal installments loans, named “Optimized Payments”. In this payment method, if there is a large difference in the final installment amount to pay down the loan, it will be redistributed across all other installments to create a more consistent repayment schedule. To accomplish this, the schedule is created in three steps:
- The standard schedule is calculated
- The difference between the installments is redistributed on the remaining installments
- Reduce the deviation per installment using the standard interpolation method
This method is available by selecting “Optimized Payments” in the Payments Method section, when creating a new product.
The following is an example with a comparison between the Standard and Optimized Payments methods.
The optimized payments steps are applied when creating or activating an account and will be reapplied when any changes are made to the schedule due dates or the number of installments.
If you have a question about how anything works or have come across something you haven't seen explained here, get in touch with our community of fellow users and Mambuvians where someone will lend a hand.
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