Interest on Arrears and Decoupling of Interest on Arrears

Overview

The Interest on Arrears functionality allows lenders to identify and manage interest accrued on the arrears portion of a loan. This functionality enables repayment through a custom payment allocation and provides the flexibility to:

• Charge customers interest on arrears.
• Maintain the interest on arrears balance separately (decoupled) from the rest of the interest calculations.

note

This feature applies to Equal Installment Interest-only Loans and Dynamic Term + Principal and Interest Loans.

Functionality

Arrears interest calculation:

• If an installment is not paid, the arrears constitute the missed installment.
• Arrears interest accrues on this missed payment.
• If decoupled from the rest of the interest, the interest on arrears can be paid via a custom repayment.
• There is no tolerance period; interest on arrears is calculated immediately upon an amount becoming overdue.

Interest decoupling:

• The interest on arrears can be decoupled from regular repayments by selecting the option Decouple Interest From Arrears, ensuring it does not affect the loan's overall repayment schedule.
• Lenders can track arrears interest separately in General Ledger (GL) accounts.

Interest application:

• Interest on arrears is applied automatically by the system on the installment due date or manually if required.
• Interest on arrears is recalculated based on partial payments of the arrears amount.

Special situations:

• During a payment holiday (PH), interest on arrears continues to accrue for late installments that occurred before the payment holiday.
• Write-offs, rescheduling, and refinancing will incorporate interest on arrears.

Closing operations:

• Interest on arrears is applied before closing a loan.
• Any unpaid interest remains tracked separately in the account balances, although it does not appear as due.

Configuration Options

Accrue late interest

If Accrue Late Interest is selected, the loan will accrue late interest and interest on arrears, which will be tracked in the interest bucket.

Not selecting accrue late interest

If you do not select Accrue Late Interest, the loan will not accrue interest on arrears.

Decoupling interest from arrears

If you select both Accrue Late Interest and Decouple Interest From Arrears, the arrears interest is separated from the regular repayment schedule maintained separately in the loan repayment schedule.