Relation between loan products and loan accounts
Any Loans issued through Kwara have to have be associated with a Loan Product which is simply a collection of settings and both machine and human-readable names used to refer to it. These products will often be a differentiating factor between your institution and the rest of the market so it is no surprise that Loan Products are highly customisible and flexible.
When creating Loan Products any fields that require setting a minimum and a maximum value, for example Minimum and Maximum Loan Value, will determine the constraints for all the loan accounts created under that product. Let's say you have a product designed for new Car Financing where the maximum loan amount has been set at €50,000; when James Bond comes into the bank looking for a help to replace his Aston Martin Vanquish, the €50,000 New Car Financing loan will probably not be the right product for him.
Create a new Loan Product
To start creating a new loan product:
- Go to Administration > Products > Loans
- New Loan Product
- Enter the information about the new product
- Check "State" checkbox in order to make the product Active
- Save Product
After saving the product you can click on "Show deactivated products " to view all activated and deactivated products. You can later activate a product from the Actions dropdown list.
Creating Loan Products will allow you to have your loan accounts sorted by categories that are easily recognizable by staff members using the system and can be easily advertised and explained to customers.
You can also compare the different products' performance and distinguish the most successful and profitable ones from those that need to be modified to achieve your strategic goals.
Product Name and ID
The new product's name should be easily recognizable or associated to the loan's purpose so that staff members or other users dealing with products can easily identify it.
The Product's ID is the unique alphanumeric code you give your products, allowing them to be identified in your database.
The description provides more detailed information about the product and is visible under the product's overview. Other banking engine users can see this information for reference when creating new Accounts using this product so you can include information that should be transmitted to the customer or reference relevant documents or flyers they can take home.
Types of Loan Products
The banking engine supports five types of loans as listed below.
If you create a Fixed Term product, you are going to have fixed interest during the whole lifetime of an account. This means, interest due will be calculated when the account is opened and won't change if a customer over or under pays. On the other hand, if you choose the Dynamic Term type, interest will be recalculated dynamically.
An Interest-Free Loan product is available if you do not wish to charge interest at all, for example, for banks offering Sharia-compliant products.
The Tranched Loan product type allows disbursing a loan over multiple tranches instead of entirely up-front. For instance, if a loan is approved for $5000, the user may disburse $2000 now and $3000 later in a two-tranched loan.
A Revolving Credit product type allows multiple disbursements and repayments on the account. It has a payment plan associated with it, in which some amount of principal and interest may be paid.
An Offset Loan product is a dynamic one which allows a redraw facility to be enabled on it, and a borrower to borrow money they've already repaid.
If you need advice on whether a particular loan product type fits your needs, please contact firstname.lastname@example.org for further information.
Under this section you can select if the product is available to Clients, Groups or Groups (solidarity), and which branches in your organization can offer it.
For Branches setup, the default for all products is to be available to All Branches. If unchecked, you will be allowed to select the individual branches to which you want the product to be available.
When an account is created for a client, group or branch, the banking engine will only allow you to select compatible products from the drop-down list.
New Account Settings
The ID settings allows you to customize the IDs generated for any loan accounts which will later be created under this product.
You can either choose a random pattern or incremental numbers for your account IDs.
This is the default option and if you choose it, when you create a new loan, the banking engine will automatically generate an ID using the format you define.
By default, the template used will be
@@@@###, in which
@ represents a letter and
#, a number. So in this case, the banking engine would generate IDs like ABCD123, QEWJ321 and so on.
You can change this pattern to any other sequence of numbers and letters you wish. To setup a random pattern select the option from the menu > use a sequence of @ and # to define your pattern.
Some organizations define their accounts' ID numbers according to a linear sequence, starting at a given number.
To define your loan account's IDs with sequential numbers select Incremental Numbers and enter the number you want the sequence to start from.
Initial Account State
Additionally you can choose between 2 default initial states when a new Loan account is created under a given product: Pending Approval or Partial Application.
The amount limits set here will define the constraints applicable when a user creates a new loan account using this product. Only loan amounts that fall within the minimum/maximum range defined at the product level will be accepted for client loan accounts. The "Default Amount " is the loan amount populated by default whenever a user creates a new loan account; these fields can be left empty to create a product with no constraints.
Accounts managed under a Credit Arrangement
In this section you can decide if accounts created for this product can be managed as part of a line of credit or not. In the “Accounts Managed under Credit Arrangement” field you will find the following options:
- Optional: (default) accounts in that product can be managed as part of a credit arrangement/line of credit, but it’s not required to have a line of credit extended in order to open an account using that product
- Required: accounts using that product can’t be approved if they’re not associated with an existing credit arrangement
- No: accounts in that product are not allowed to be managed under credit arrangements
For more information reach out to: email@example.com
For Tranched Loan type products you can specify if the loan amount can be disbursed in multiple tranches.
At the product level, only the maximum number of allowed tranches is set; the number of tranches for a given loan account will be defined when it is opened/applied for.
Interest Rates Methods
Depending on the Loan Product Type you have selected, you can choose from up to three available methods for calculating interest as indicated in the table below. For Interest Free loans, there are no options available.
Fore more datails on each method, please check the article Interest Calculation Methods in Loans.
Please Note: Interest for all the loan accounts created under a product is calculated using the same method.
Interest Application method
This option defines when the banking engine applies any accrued interest. There are two options available:
- On Disbursement: All loan interest is applied as soon as the loan is disbursed, and booked as income at that point.
- On Repayment: Interest is applied for each instalment on the instalment's due date.
Defining the interest rate
To set the interest rate for the new product, select how it is charged and enter the default, minimum and maximum values.
Please be Aware: If you later change the calculation method in the product, all accounts created before the change will keep the original method for calculating interest. Only loan accounts created after the product has been edited will use the new calculation method.
Accrued Interest Posting Frequency
With this option you can specify the moment when the accrued interest is applied in the account:
- On Disbursement - all due interest (for the total duration and amount of the loan) will be accrued and applied in the account upfront on the disbursement date.
- On Repayment - interest will be applied in the account on the instalment's due date.
If you select On Repayment for a Fixed Term Loan you will be able to select the option to Accrue Interest After Maturity.
With this option enabled loans in arrears will continue to accrue interest after the fixed maturity period.
Please note: Interest accrued after a loan has matured will not be applied automatically and will need to be applied manually by going to more → Apply Acrued interest. An extra installment will be added to the repayment schedule for the currently accrued amount.
Other available options will depend on the Product Type selected.
Calculate Interest Using
This option is only available for loan products using the Revolving Credit product type
For Revolving Credit loan products you can select whether to calculate interest using the Principle Only, as is often the case in business loans, or based on Principle and Interest, as is common for credit cards.
Days in Year
Depending on your internal practices, you can choose to calculate interest over 365 or 360 days in a year. Given that interest accrues daily during a loan's lifetime, the interest due for any loan depends on the number of days in the month and is determined by the difference of days between the last repayment and the current one.
In a 360 year, every month will be considered as having 30 days, whereas the 365 days option will take into account the actual number of days in each month.
Repayments Interest Calculation
This option is only available for loan products using the Fixed Term Loan product type
There can be ocassions where the days between instalments can differ from a regular schedule, for instance when there are more (or fewer) days between disbursement and the first repayment than for the other instalments, or when an instalment's date is moved because of a holiday.
Here you can choose whether you would like to consider the real number of days when calculating interest for the instalment, or if all instalments should have the same interest regardless of the number of days between each instalment.
Consider for instance a loan that's usually repaid once every two weeks. It's disbursed on December 1 but the first repayment date is set to December 20.
Although this is 19 days away from disbursement, if you don't want the interest calculation to consider the first repayment duration, you should use the option Using Repayment Periodicity. In that case it will be calculated as though it's just two weeks' worth of interest (i.e. 14 days) like all other repayments. With this setting, every instalment will be calculated with the same amount of interest, regardless of the real number of days that have passed.
If you were to use Actual Number of Days instead, then the interest would be calculated based on the real number of days between December 1 and December 20 -- 19 days' worth of interest. This setting would also modify all other instalments that have a different number of days than usual, for example, because of holidays.
Additional Reading: Interest Calculation Methods in Loans
Interest Rate Types
Allows you to choose how the repayment schedule will behave with prepayments, postpayments or any extraordinary events.
With the Fixed method the expected principal and interest are the same throughout the whole loan life cycle, regardless of extraordinary repayments. Its flexibility comes from the fact that it allows for editing the repayment schedules and manually moving due dates, reallocate principal, fees and interest amounts between repayments.
With the Dynamic method, the repayments can be automatically recalculated when there is a prepayment or a postpayment and it's particularly useful for long term loans.
If you choose the Dynamic method for schedule calculation, the Accrued Interest Posting Frequency will automatically be set to “On Repayment”. This results from a possibility in Dynamic method to recalculate the interest during the life of the loan.
Payment Interval Method
For products using the Dynamic method, you can choose:
- Fixed Days of Month
Option 1: Interval
Choose Interval to specify that payments should be made after certain periods of time - monthly, weekly, etc. You can then further customize the repayment frequency and constraints for offsetting the first due date.
Suppose you want the repayments to be made every two weeks.
Enter the number (2 in this example) > select "weeks" from the dropdown list. This will define the period between repayments.
To define the number of instalments, enter the default, minimum and maximum values in the appropriate fields.
Please Note: If you want a more flexible product that allows you to select any repayment frequency when creating a loan account, leave this section blank.
First Due Date Offset Constraints
This allows you to establish the constraints for the number of offset days that can be established for the first repayment date.
The number of days you enter in Default will be automatically added to the first repayment due date when a new account is created under this product. The Minimum and Maximum values will determine the actual constraints for the offset days and ensure that users can only set a number of offset days that's within that limit.
Option 2: Fixed Days of Month
Choose this option if repayments should always fall on specific days of the month, such as always on the 1st and 15th of every month. This option is commonly used for payday loans, for instance.
Short Month Handling
If the Fixed Days of the Month option is set to have payments due on the 29th, 30th, or 31st day of the month, Short Month Handing will "move" the instalment when the month has fewer days.
The system will create the instalment for that month to be due to either last day of the month (e.g. 28th) or the first day of the next month – depending on your choice.
Principal Collection Frequency
It's common practice in some countries to have repayment schedules in which clients pay principal on a certain number of instalments and only interest on the others.
If you use this methodology, you can set the principal collection frequency by entering the number of instalments for which there should be no principal collection.
Example of a Loan Account with Collection Repayment Frequency set at every 3 repayments:
The grace period will determine if the repayment schedules should include instalments in which either principal only, or both interest and principal are not paid. To define the Grace Period, just click the dropdown list to choose the option you wish. There are three different possibilities:
- No Grace Period
- Principal Grace Period, will determine that clients will only pay interest for the duration of the grace period.
- Pure Grace Period , determines that the client won't pay interest or principal for the duration of the period.
Repayment schedule with no grace period
Repayment schedule with Principal Grace Period
Repayment schedule with Pure Grace Period
Rounding of Repayment Schedules
Depending on the number of instalments, some loan amounts end up with a small difference when divided by the instalments. There are 2 different options for dealing with those cases:
- No Rounding
- Round Principal Remainder into Last Repayment
If you choose No Rounding , when there is a discrepancy between the loan amount to be disbursed and the total balance after rounding, the banking engine will show you a warning message asking you to either adjust the loan amount or the number of instalments.
If you choose to Round Principal Remainder into Last Repayment, the banking engine will automatically add the discrepancy amount to the last repayment.
Suppose you create a loan of $1000 with 3 instalments. This would result in a repayment schedule with instalments of $333.33 which would sum up to a total of only $999.99 instead of $1000.
In this case, if you had chosen the rounding options, the cent that is missing would be added to the last repayment (second and third repayment schedules in the example above).
Rounding of Repayment Currency
In practice, some countries don't use the currency's decimals in their daily life. So when calculating the repayment schedules the repayments should be displayed as an amount that the client can actually pay, which implies rounding the installments to display a whole number.
If you want the banking engine to automatically round your repayment schedules, when creating a new product, you can choose one of the following options:
- No Rounding
- Round to Nearest Whole Unit
- Round Up to Nearest Whole Unit
If you choose No Rounding decimals will be left as they are. However you can choose Round up to Nearest Whole Unit so for instance 62.2 becomes 63, and Round to Nearest Whole Unit, which will work similar but 62.2 would become 62 and 62.5 would become 63.
Repayment schedule with Rounding
Repayment Schedule with No Rounding
Payment Allocation Method
Allows you to define how the repayments should be posted in the repayment schedule.
When a repayment is entered for an account using Horizontal Payments it's the actual repayment schedule that will determine what should be paid first based on the due dates. The amount entered will always be used to pay each instalment and only move to the next instalment due, when the previous has been completely paid.
Fees and penalties are always associated to specific repayments and become due when that repayment also is due.
Accounts using Vertical Payments will be paid based on the account balances of principal, interest, fees and penalties, following the allocation order defined in the product.
Payments are allocated based on the type of outstanding balance (interest, principal, etc) regardless of the repayment schedule.
Fees and penalties are not tied to a specific date. As soon as they are applied they become due and can be paid at any point in time.
Please Note: The Vertical Payments option is only available for the Dynamic schedule calculation method.
Please see Horizontal vs Vertical Payment Allocation.xlsx for examples of each payment allocation method.
Some organizations don't allow pre-payments for certain products, such as those using Declining balance methodology. By default, the banking engine will show the option to "Do Not Accept Pre-Payments". If you want to allow pre-payments for a specific product, click on the menu to select that option.
When enabling this option, a set of options will appear, depending if the product has Fixed or Dynamic schedule calculation.
Interest Pre-Payments Acceptance.
Some organizations would like to allow their customers to pay in advance also the interest that is not due yet for upcoming instalments.
There are three options in this menu:
- Do not Accept Interest Pre-Payment (available for fixed and dynamic products, default selection)
- Accept Postdated Payments (available for fixed and dynamic products). This will post the repayments in different future-dated transactions depending on the payment amount.
Please be Aware: Accounting-wise, when interest is pre-paid the amount of pre-paid interest is credited to a deferred interest account, when the due date finally arrives it will go to the usual interest income account.
Apply Interest on Pre-Payment
On Dynamic accounts, when a pre-payment is made it is usually desired to collect interest first, however for this to happen interest has to be applied before the pre-payment. By default the banking engine is set to do this automatically, if this is not desired manual interest application can be selected. When manual is selected a pre-payment will cause interest to be applied after the payment.
For Dynamic scheduled accounts, this lets you define if and how the account recalculates the schedule when there is a pre-payment, you can find more information in the Pre-payment Recalculation Methods article.
Repayment Allocation Order
For cases of prepayments, partial repayments or fees and penalties payment, the allocation order defined at the product level will determine what will be paid first.
Suppose you wanted the principal to be paid first, then interest, fees and finally penalties. In this case Principal would be on top of the list and Penalties on the bottom.
To move the items, just click, drag and then drop them at the right place.
Overdue Payments Settings
The setting Overdue Payments is usually set to Increase Overdue Instalments. However, for a particular configuration (that is if you select Reduce Number of Instalments for Pre-Payment Recalculation) you can chose Increase Last Instalment.
The purpose of the setting is to determine what to do with Interest from Arrears. When a loan is in arrears, additional regular interest will be calculated on the overdue principal balance. Usually this additional interest will need to be repaid in addition to the scheduled instalment amount (i.e. Increase Overdue Instalments). If Increase Last Instalment is chosen, the banking engine will not adjust the overdue instalments, which results in an underpayment of principal. The principal will then be recouped in the last instalment.
To illustrate the explanations above see below for two identical loan accounts, one with Increase Overdue Instalments, the other with Increase Last Instalment. The loans were backdated so that there are late instalments. The repayment made shows how the late or last instalments were affected.
Increase Last Instalment
Increase Overdue Instalment
Arrears settings control how a loan's days in arrears should be calculated. These settings affect anything that is derived from a loan's days in arrears, such as penalties, notification templates, reports.
Penalties are charges that are applied when loans go into arrears, for more details please see the separate article Loan Penalties Setup.
There are different types of fees that can be applied to loan accounts and that are defined under each product. For more details on each type of fee and the available options, please refer to the separate article on Loan Fees.
Loan securities are used by organizations to secure some guarantee against the loan amount. For more details please read the separate article Securities Settings.
Linking accounts allows you to have loan repayments being automatically made from a client's deposit account. Given that a deposit account is being used as source for repayments, on the day the repayment becomes due, the amount is automatically transferred from the deposit account as a repayment on the loan account.
Once Settlement Account Linking is enabled, you can choose the Settlement Account Deposit Product that you want the Loan Product to be linked to. Here you have an option to choose either “Any”, meaning that you’ll be able to link the loan account created for this product to any deposit account available, or you can choose a Funding Deposit Account. If you decide to link the loan account to a specific deposit account you will find two different options available:
- Auto-Link will make sure that any loan account you create under that product will automatically link to the client's deposit account, if he has one. If the client has several deposit accounts, the loan won't be automatically linked with any of the deposit accounts and you will have to link the correspondent accounts manually.
- Auto-Create. If the client doesn't have a deposit account yet and this option is checked, the banking engine will automatically create one when you open a new loan and link both accounts.
Additionally, there are two different Settlement Options available for linked products:
- Only transfer full dues - allows only transfers of the total amount due - the transfer of funds will only be performed if there are enough funds on the deposit account to cover all the instalment due, otherwise nothing will happen.
- Allow partial transfers - even if the funds on the deposit account are not enough to cover all the instalment due, the transfer will still happen.
- No automated transfers - allows auto-creating linking loans to settlement deposit accounts, but doesn’t perform automated transfers.
Both the Loan and Deposits products must have the same accounting setting: either both have it disabled or enabled
Value Added Taxes
It is a regulatory requirement in many countries that organizations offering loan accounts have to pay taxes on the interest, fees or penalty income generated on those accounts - these are generally called "Value added taxes" or VAT, because they are collected on revenues.
The option under this section allows you to enable the value added tax functionality - by checking either one of the "Apply taxes to" checkboxes for Interest, Fees and/or Penalties under the Taxes section.
For any of the checked options, the banking engine will calculate taxes each time they are applied on the Loan accounts, depending on the type of tax, as described below.
Tax Rate Source
To be able to add taxes on a Loan Product, a Tax Rate source must be previously defined under the Administration - General - Rates section. For more information please see Tax Rates.
Tax Calculation Method
Value added taxes on Loan accounts can be either exclusive or inclusive.
- Inclusive taxes, will be already included and calculated for any interest/fee/penalty income. For example, a 10% inclusive tax rate on an interest income of $100 will result in $10 included as VAT, the total charged to the customer would be $100 ($90 interest, $10 taxes).
- Exclusive taxes, are calculated on top of the stated interest/fee/penalty amount. For example, a 10% exclusive tax rate on an interest income of $100 will result in $10 as VAT, which will be added on top of the $100 interest, meaning a total charge of $110 ($100 interest, $10 taxes).
This is where you can choose whether or not the product will be linked to the accounting module and which methodology to use.
After choosing the methodology - Cash or Accruals based accounting - you will be able to define the accounting rules for that product. To do so, just select the appropriate GL account for each action.
For more details on each methodology and on the accounting rules, check the articles Methodologies.