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VARIABLE INTEREST LOANS

For a number of reasons, the interest rate used when a Loan Master file is established with GMS-RLSS may change.  Whether it goes up or down, tracking that rate and posting activity correctly can easily be handled.  In order for variable interest rate loans to calculate properly, they should be established as Daily interest within the Loan Master file.  If you have loans set as Amortized and need to change the interest rate, edit the Loan Master file to Daily interest on a temporary basis (see NOTE below).

First of all, if you know in advance when the rate will change, you may want to establish an optional field containing the date of the scheduled change.  You can then use this optional field to help create a “tickler file” to remind you when rates are due to change.  The data within this optional field may be accessed through Master File Query and Quick Date Listings.

Once you know the exact date the rate will change, there are two steps required.  This process can be repeated whenever necessary.
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1. Select Loan Activity and post a zero repayment.  By doing this, you trigger the software to calculate interest due at the old rate through the date of the rate change.  When posting this zero repayment, use the date the interest rate changed as the Activity Date, repayment as the activity type, and zero activity total.  This will result in a positive number within the “accrued interest” field – this represents the interest due at the old rate.  If you are using escrow accounts or automatic penalties, there may also be numbers in those fields.  If there are, manually adjust those fields to zero.  The activity should reflect a positive number in accrued interest only, with no impact on principal or the loan balance.  For the “new paid-thru date” use the most recent valid date.  It will appear in the lower left-hand side of the screen.  You are not advancing the paid-through date because you are not posting an actual repayment.  Within the notes section of the activity, document the date and amount of the rate change.
2. Select Loan Master to change the interest rate within the loan’s master file.  You may also need to alter the payment amount, depending on your lending procedures.  Future repayments posted will be calculated at the new rate.  When the next repayment is posted, be prepared to see negative numbers within the Accrued Interest field.  This will continue until all accrued interest is repaid.

IMPORTANT NOTE: If the loan was established as Amortized and you have changed it to Daily to handle the above steps, you should leave the Loan Master file at Daily until the next repayment is posted.  This allows the program to properly calculate interest from the date of the rate change until the date of the repayment; interest from the last payment until the rate change is now “accrued” interest.  Once that payment is recorded, you may edit the Loan Master file back to Amortized if desired.
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The Automatic Rate Change feature can accomplish the above steps automatically.  If this feature is used, the payment amount within the Loan Master file will be recalculated and edited based on the remainder of the loan term, the loan balance, and the new interest rate.