13.1.7 Process Prepayments of Installment Loans

If a customer repays the loan amount before the maturity date, the customer account is debited for the outstanding principal and the outstanding unearned interest amount should be reversed. In such cases, you need to use the interest income GL as the settlement account for the interest amount.

Let us assume that a customer settles the loan amount before the maturity date of the contract. Let us represent the outstanding loan amount as P and the outstanding unearned interest amount as I. Follow the steps given below to handle such prepayments:
  • You first need to liquidate the principal amount in the payment screen (Refer to the topic on Processing Repayments for details on specifying the repayment details). The accounting entries that are passed as a result of this payment are:
    Accounting Role Amount Debit/Credit Indicator
    Customer Account P Dr
    Loan Asset GL P Cr
    After liquidating the principal amount, you need to liquidate the unearned interest amount in the Schedule Payment screen. For this, you need to use the interest income GL as the settlement account.
    Accounting Role Amount Debit/Credit Indicator
    COMPONENT_INC

    This indicates the Income GL

    		 I Dr
    COMPONENT_UIR

    This is mapped to the Loan Asset GL

    		 I Cr
    After passing these entries for the outstanding unearned interest amount, the system then passes the below entries as part of completing pending accruals:
    Accounting Role Amount Debit/Credit Indicator
    COMPONENT_UIP I Dr
    COMPONENT_INC I Cr

Reversal of Outstanding Unearned Interest amount

As stated earlier, the following entries are passed as part of UIDB event:
Dr/Cr Accounting Role Description
Debit Loan Asset GL Unearned Interest Amount
Credit Unearned Interest GL Unearned Interest Amount
If the loan becomes delinquent subsequently, and the outstanding unearned interest amount needs to be reversed, you need to change the status of such a contract to a new one. The system performs this action by posting the following entries:
Dr/Cr Accounting Role Description
Debit UID GL Unearned Interest Amount
Credit Loans Asset GL Unearned Interest Amount
The system passes these accounting entries only if you have maintained the following GL transfer setup for the unearned interest accounting roles in status change
  • ComponentUIP: This should be mapped to the loan asset GL.
  • ComponentUIR: This should be mapped to UID GL.
If the interest or principal amount is repaid after a contract status is changed to PDO Accrual, PDO Non-Accrual or Write-Off you can process the payment using the loan payment screen.

You need not change the status of the contract to normal to enter such payments. The system automatically reduces the amount from the PDO Accrual GL or PDO Non-accrual GL, depending on the current status of the contract.

Parent topic: Introduction