What: An option for Declining Balance Equal Installment loan product to increase the total payment amount expected with installment 1 in order to reflect an increase in the interest amount caused by moving forward the First Repayment Date.
Let’s take a below loan account as an example:
- amount = 1,000
- monthly repayments,
- Disbursement = 01/06/2018
- First Repayment Date = 01/07/2018
- monthly interest rate = 12%
- 6 installments
- PMT = 243.23
- interest = 120.00 (assuming Act/360 day count, calculated for 30 days)
If the First Repayment Date is changed to 16/07/2018, interest will increase to 180.00 (calculated for 45 days) and with this idea in place, there would be 2 options to reflect that to choose from on the Product level:
(1) keep PMT = 243.23 = 180.00 interest + 63.23 and adjust the principal amount collected with the last installment (which, as a result, will be higher) —> the current behaviour
(2) increase the PMT by the amount the interest increased due to extending the duration of the first installment, i.e. by 60.00 (180.00 - 120.00). As a result, PMT = 303.23 = 180.00 interest + 123.23 principal —> the new behaviour
Why: This approach will solve the issue with a negative principal that may occur if the first installment is much longer, causing the interest amount to be higher than the PMT and therefore resulting in a “negative principal” error. These calculations should not prevent any organisations from charging the required interest rate/ extending the first installment duration according to internal business rules.
The newly proposed option is also easier to explain and justify to the end clients, who need to pay more for the first installment due to the extended period between the loan account activation (i.e. receiving the disbursed funds) and the first installment due date. The remaining instalments will remain equal until the end of the loan duration (with possibly some small mathematical adjustments in the last instalment).
This is more intuitive than keeping the first installment equal and expecting to collect a much higher last installment. It often happens that the clients are not willing to pay the difference between the PMT amount and the last installment amount, not understanding where the increase is coming from.