Paying What Is Owed
When a payment is made for a loan:
- The contract's payoff amount is reduced by the payment amount.
- The contract's current amount is reduced by the payment amount.
The events that happen when a customer makes a payment against a loan is controlled by the FT algorithm plugged in on the loan contract's payment segment type. We'll use an example to help explain how this algorithm works. The 3 rd entry in the below table illustrates the financial transaction produced when a payment is made (note, the first two financial transactions were described above).
| Event | GL Accounting | Effect On Current Balance | Effect On Payoff Balance | Current Balance | Payoff Balance |
|---|---|---|---|---|---|
| Loan contract is activated |
Long Term Loan Receivable 10000 Cash <10000> |
0 | 10,000 | 0 |
10,000 long-term: 10,000 |
| First bill segment is produced |
Interest: Long Term Loan Receivable 41.66 Interest Revenue <41.66> Transfer Long Term To Short Term: Short Term Loan Receivable 438.71 Long Term Loan Receivable <438.71> |
438.71 | 41.66 | 438.71 |
10,041.66 short-term: 438.71 long-term: 9,602.95 |
| Payment is made |
Affect Cash Cash 438.71 Long Term Loan Receivable <438.71> Transfer Long Term To Short Term: Long Term Loan Receivable 438.71 Short Term Loan Receivable <438.71> |
-438.71 | -438.71 | 0 |
9,602.95 short-term: 0 long-term: 9,602.95 |
The financial transaction illustrated above is created if you use a payment segment FT creation algorithm of Payoff Amt = Current Amt = Pay Amt on the loan's payment segment type. The following explains how this algorithm works:
- The contract's current balance decreases by the amount of the payment amount. In other words, the customer thinks they owe 0 after the payment. Note refer to Overpayments for information about how an overpayment affects the contract's balances and the general ledger.
- The contract's payoff balance decreases by the amount of the payment. In other words, if the customer wanted to payoff their loan, they'd owe 9,602.95.
- The Cash portion of the GL accounting is straightforward (if you're an accountant). It simply takes the amount of the payment and debits it to the payment segment type's distribution code (typically cash) and credits it to the contract type's receivable distribution code (long-term receivable).
- The Transfer portion of the GL accounting effectively reduces short-term receivables by the FT's effect on the customer's current balance. This reduction is handled by an offsetting increase to long-term receivables (to make up for reduction made when the cash was applied). Again, this differentiation between short-term and long-term receivables allows the general ledger to differentiate between unbilled loan receivables (long term) and billed loan receivables (short term).