Loan Overpayments
Overpayments reduce the principal amount (the amount owed on the loan), which follows the philosophy adopted by a typical home loan. When the payment is made, any overpayments are distributed according to the overpayment distribution algorithm defined for the customer class. Typically, loan service agreements should be set up so that the overpayment is applied to the principal balance.
When the payment transaction is frozen, the system checks to see if there is a credit amount on the loan SA's current balance. If a credit exists, the customer has made an overpayment and an adjustment is created to transfer the amount of the credit from the SA's current balance to its payoff balance, thus reducing the principal by the amount of the overpayment.
For more information about the adjustments created for loan overpayments, refer to Overpayments On Loans.
Overpayments and interest. The base package interest calculation algorithm (plugged in on the loan's SA type) does not take into consideration the exact date that the overpayment is made when calculating the interest for the period. It only takes into consideration the outstanding principal amount (payoff balance - current balance) at the time of the interest calculation.