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We often receive questions regarding how to handle interest only loans. These loans aren’t really much different from a loan that is going to start making full payments right away. The only difference is the amount of payment they are going to make in the first months of the loan. Of course, there are some ramifications to activity associated with these loans, so it really isn’t quite that simple.
When dealing with the issues of loans that don’t start out with regular payments of principal and interest, it is important to remember that the Loan Master file is intended to be a document that changes as the circumstances of the loan change. The regular payment amount, the method of interest calculation, the percentage of interest calculation and the frequency of payment should all reflect the situation as it exists at this point in time. When circumstances change, the Loan Master file should be changed. For a complete audit trail, GMS recommends that whenever the loan profile is changed, a copy of the revised profile should be printed, and filed with the documentation requiring the change, or you may wish to go paperless by exporting the loan profile and then “attaching” it to the Loan Master.
Regular Payment Amount
When entering the Loan Master file for a loan that will be making interest only payments for a period of time, override the computer generated regular payment amount and enter the amount the borrower will be paying. This amount will usually be one payment cycle’s interest. If you would like to have GMS calculate this amount for you, before you enter the Loan Master file select Amortizations. Enter the loan amount, the interest rate, the number of payments per year, and the term of the loan. When the amortization schedule is reviewed, the interest for the first payment will be the payment amount while the loan is paying interest only. This is the amount entered as the regular payment. When the borrower begins making full payments, the regular payment amount should be edited to the full payment.
Method of Calculating Interest
The internal management policies of your agency will dictate which method of interest calculation you will use.
If using Amortization, each payment will be applied 100% to interest.
If using Daily interest, there may be some differences in the amount of interest collected from each payment. This is due to timing differences. If the payment is received a few days early, there may be a small amount applied to principal. If the payment is late, there may not be enough to pay all the interest, thus accrued interest will be calculated and carried forward. In either case, GMS-RLSS software will apply the correct amount of interest.
Frequency of Payment
If it will be several months before the first payment is to be made, the First Payment Due date in the Loan Master file should reflect that interval. Additionally, the Next Payment Due field for Disbursements should reflect this advanced date. If the Disbursement has already been recorded, you may edit this field by going to Tools, Build History. If this is done, the delinquency and aging reports will not reflect past due payments when the client is abiding by the terms agreed upon.