Billing For Loans And Interest Calculation

A bill segment is produced for a loan when its contract's account is next billed.

Factors on a loan's contract type controls when a bill segment is produced for a loan. Typically contract types for loan contracts are set up to use anniversary calendar billing . For this configuration:

• You must indicate the type of anniversary billing in the calendar billing option. Currently, we only support the Anniversary Future Billing (meaning that loans are billed in advance just like a classic home loan is). Refer to Using The Anniversary Method for more information about how this billing method controls the end date of the loan bill segment.
• You must reference an anniversary billing frequency consistent with the recurring charge frequency (e.g., monthly, quarterly, etc.).

To set up for a loan that is billed on a monthly basis, you would define the following fields in Contract Type - Billing:

• Use Calendar Billing: Anniversary Future Billing
• Anniversary Bill Frequency: Monthly
• Total Bill Amount: Required
• Recurring Charge: Required
• Recurring Charge Frequency: Monthly
• Total Amount To Bill Label: Loan Amount
• Recurring Chg Amt Label: Payment Amount

If your type of loan must be billed on an exact date (for example, always on the 15 ^th of the month) or with an exact number of days between each bill (for example, every 14 days), then your loan should be set up to use the calendar billing option of Use Bill Period. In order for your loan bills to be created on specific dates, the system makes the following assumptions:

• Your bill cycle schedule for the loan's account is defined with the dates that you want the loan to bill and is defined with the window start date equal to the window end date.
• You define a bill period schedule corresponding to your bill cycle schedule. Each bill period schedule's bill date should match your bill cycle window start date and each bill period schedule's bill segment end date should be set to the loan period end date.
• Considerations for the first bill. If the loan contract type's Initial Start Date Option indicates that the first day of the contract should be billed, then the loan contract's start date should match the window start date of the next bill cycle schedule for the account. If the loan contract type's Initial Start Date Option indicates that first day of the contract should not be included, then the loan contract's start date should be one day prior to the window start date of the next bill cycle schedule for the account.
• Define your recurring charge frequency to match the frequency of your bill periods.

How the bill segment affects the customer's balance, and how it affects the general ledger are controlled by several algorithms defined on the loan contract's contract type and bill segment type :

• The contract type's loan schedule algorithm controls how the loan amortization schedule is calculated.
• The contract type's loan interest charge algorithm controls how interest is calculated.
• The bill segment type's create algorithm controls how the bill lines are constructed.
• The bill segment type's financial algorithm controls how the general ledger is affected by the bill.

The 2 ^nd entry in the below table contains an example of the financial transaction produced by the base package algorithms (note, the first financial transaction in the table was described under Booking The Principal Amount Using An Adjustment ).

Several important points are illustrated above:

• When a bill segment is produced for a loan contract, the following takes place (if you use a bill segment creation algorithm of Create Bill Segment for Loans):
  • The loan contract type's bill segment creation algorithm calls the contract type's loan interest charge algorithm.
  • The base package loan interest charge algorithm calculates simple interest based on: 1) unbilled principal (i.e., the contract's payoff balance minus the current balance), 2) the number of billing periods covered by the bill, and 3) the interest rate . Refer to the algorithm type LINT-SI for more information about the base package interest calculation algorithm.

• The contract type's bill segment creation algorithm uses the calculated interest to format the bill segment's bill lines. It creates one bill line to show the amount of interest in the payment, and another bill line to show the amount of principal. The principal amount is equal to the contract's periodic payment amount minus the amount of calculated interest.
• The financial transaction illustrated above is created if you use a bill segment financial algorithm of Payoff Amt = Interest / Current Amt = Bill Amount on the loan's bill segment type. The following explains how this algorithm works:
  • The contract's current balance increases by the amount of the loan's periodic payment amount (i.e., its recurring charge amount). In other words, the amount the customer thinks they owe increases by 438.71.
  • The contract's payoff balance increases by the amount of interest. In other words, if the customer wanted to payoff the loan, they'd owe 10,041.66.
  • The Interest portion of the GL accounting is straightforward (if you're an accountant). It simply takes the amount of interest and debits it to the contract type's receivable distribution code (long-term receivables) and credits it to the distribution code defined on the interest rate's bill factor (typically interest revenue).
  • The Transfer portion of the GL accounting transfers moneys from long-term receivables (i.e., the unbilled principal) to short term receivables (the billed portion of the debt). The amount transferred is equal to the FT's effect on the contract's current balance, allowing the general ledger to differentiate between unbilled loan receivables (long term) and billed loan receivables (short term). Remember that the payoff balance is the net of the short-term and long-term receivables.