Appendix B :Variable and Fixed Interest Rate

B.1 Variable Interest Rate Lease

A variable interest rate lease is one in which the interest component of the payable lease can fluctuate over time. This fluctuation can be either due to periodic changes in index rate or varying interest rates in the market. Accordingly, the lease amount may increase or decrease depending on the variable interest rate.

For Variable rate lease, the interest rate basically consists of two components:

Note

Interest rate = Index rate + Margin rate.

During lease origination and up to the funding process, the interest rate is computed based on the prevailing index rate at the time of approval. However, once the lease is funded, the interest rate on the lease may change when the index rate changes. This interest rate change may causes changes in the lease repayment amount, if specified in the terms of the contract.

Oracle Financial Services Lending and Leasing supports the variable rate functionality for closed-end lease during the originating, funding, and servicing of new products and lease with interest rates based on various industry-standard interest rate indices.

Variable rate calculation for Lease is supported for ‘Interest Rate’ calculation method only. During product setup, on selecting the lease calculation method as ‘Interest Rate’, the following fields are enabled and also the ‘Rate Adjustments’ sub tab is available to specify the details:

Note the following for lease variable rate calculation:

During the Product setup, you can define and control the changes in lease amount using 'Reschedule Method' and 'Reschedule Value' fields.

Hence the impact of variable rates on lease amount can be controlled to stop negative amortization.

B.1.1 'Rate Adjustments' for Variable Rate Lease

Every lease contract can have different limits on interest rate change as indicated below:

Note

These limits are enforced when processing the interest rate change on the lease.

OFSLL supports such Adjustable-Rate Mortgages (ARM) by defining them accordingly in the 'Rate Adjustment' tab of Product setup screen.

In the 'Rate Adjustment' tab (Setup > Products screen > 'Rate Adjustment' tab), multiple records can be created depending on the limits defined for each ARM's.

For example:

B.2 Fixed Interest Rate Lease

Fixed interest rate lease is one in which the rate of interest remains fixed from funding till the lease entire term. Hence, the lease amount does not change with fluctuations in index rate or market rates.

In Oracle Financial Services Lending and Leasing, fixed interest rate lease can be defined in the following way:

Since the index rate is always zero for this Index Type, the lease interest rate will always be the Margin rate (i.e. contract rate) which does not change during life of the lease.