I would like to convert 7500 of accrued interest to principal. Can this be done in Margill Loan Manager?

Question: I would like to convert 7500 of accrued interest to principal. Can this be done in Margill Loan Manager?

Answer: Certainly with special Line statuses.

First, go to Tools > Settings:

Make sure “Interest paid” is available (not checked to Hide from menu) as well as an “Add. Principal X” Line status.

We will rename Add. Princ. (3) to “Capitalized interest” (or another name that fits your needs). We cannot however rename “Interest Paid” so you must be careful when using this. If it is already used to pay, on a cash basis, pure interest in other loans (as opposed to using it as we will do now), then you will have to note this in your reports not to mix up cash and non-cash items.

Normal scenario where Interest remains interest (in Simple interest no interest is generated on interest – Day count is 30/360 for equal interest every month):

 

We will “pay” 7500 in interest and add 7500 in this new “principal” (non cash). Insert 2 lines (right mouse click)

Since interest is now capitalized (so really brought to Principal), the new monthly interest amount increases. You could have said no interest on the 7500 but this becomes a little strange (right mouse click on the line).

When reporting you will need to isolate these special transactions as not to mix them up as cash transactions.

Personally, I would not have converted interest to principal since I believe from an accounting perspective interest must remain interest, not be converted to principal, but you are doing this for a good reason…

I would have done it this way by telling the system to capitalize the 7500 (thus there would be interest on this amount- goes to Computational Balance):

Comes up to the same mathematical results but interest remains interest:

After more than 2 years of work, the latest version 5.1 of the User Guide is now available. In it you will learn all you need to know about the new features.

How can I create a schedule where I can see the interest that accrues on a daily basis, every day?

Q: My law firm must calculate the interest from June 30, 2019 to May 28, 2020 on an amount due by an insurance company. I must be able to see the interest that accrues every day.

Interest rate is 4% annually and amount is 150,250.33.

A: In Margill Law Edition, you would usually use the “Interest on one amount between two dates” calculation:

Data entry:

This would give you the amount as two lines with a split on December 31 at midnight:

I know, you want detail, lots of it, on a daily basis so instead of using “Interest on one amount between two dates”, use the very powerful “Recurring Payments (Amortization)” calculation that can do just about anything, not only loans or mortgages.

Here is how I would enter the data to see the payments every single day. Notice:

  • “First Payment Date” is one date after my “Origination Date” or start date
  • “Payment Method” = “Payments set to 0.00”.
  • For “Number of Payments”, I right clicked with the mouse to enter 05-28-2020 and Margill calculates a cool 333 payments (of 0.00)

We get a 333 line schedule with the daily interest for each day.

We get almost the same amount as in the calculation done with “Interest on one amount between two dates”. We are higher by 0.66 since the calculations below are done line by line and the 2 decimal point pennies leads to this slight difference.

—————————————

In Simple interest, using the Actual/Actual Day count, the interest in 2019 is slightly higher than in leap year 2020. This also could have be done in Compound interest where the daily interest would change almost every day.

Remember the interest for the end date is excluded. So interest does not include the interest for May 28, 2020.

Easily create and manage Covid 19 (Coronavirus) Emergency Business Loans with Margill Loan Manager Software

Federal, state and provincial governments, townships, cities and towns all over the world have created very generous loan programs to help businesses as they struggle with the global pandemic and the effect of confinement.

These loans can take many shapes and finding the right software to properly create and manage these is not always easy. Excel, for all the respect I have for this great software, can do part of the job but struggles with many interest calculation items and exceptions that are the normal for these loans.

Here are various scenarios these loans can take and how Margill Loan Manager can be used to create payment plans adapted to the loan programs or to the borrower’s needs. Then Margill can easily manage or service the actual payments as they are paid… or not not paid…

Typical Covid 19 Emergency Business Loan scenarios:

  • Interest throughout, deferred payments
  • No interest for a number of months, no payments for a number of months, deferred payments
  • Interest-only for a number of months followed by principal and interest payments
  • Above options + seasonal industry cash flow (tourism, agriculture, etc.)

Interest throughout, deferred payments

  • Loan amount: 25,000
  • Interest rate: 3%
  • Loan starts May 15, 2020
  • Deferred payments for 6 months
  • 36 months to pay back principal and interest

Result – notice first payment is December 1, so no payments from June 1 to November 1 inclusively:

+++++++++++

We could have done this slightly different to see the first 6 months with no payments but this is not required since Margill extracts the accrued interest and balance at any date…

I would have entered 42 payments (36 + 6) and changed the first payments to 0.00 and recomputed the next 36 payments. A 10 second process.

A Comment can be added in the Comment column or we (you, the Margill Administrator) could have created a special Line status called “Deferred – Covid 19”, for posterity… Hmmm…


No interest for a number of months, no payments for a number of months, deferred payments

  • Loan amount: 25,000
  • No interest first 3 months
  • Interest rate thereafter: 3%
  • Deferred payments for 6 months
  • 36 months to pay back principal and interest

We can take the results from the example above. Right mouse click to change the interest rate for the first 3 months to 0.00%:

Select the 36 payments (as of line 7), right click and recompute the payments to give  a 0.00 ending balance:

Final result (top half of 36 payment schedule only):

Notice the borrower saves about 5,00 per payment because of the 3 months with no interest.


Interest-only for a number of months followed by principal and interest payments

  • Loan amount: 25,000
  • Interest rate: 3%
  • Deferred principal payments for 6 months
  • 36 months to pay back principal and interest

Entered 42 payments since 6 months are interest-only and 36 months P&I:

Select Lines 7 to 36 and “Payments Adjusted for Balance = X” where X will be 0.00

Final result (top of 42 payment schedule only):


Catering to seasonal industries with irregular cash flows

High cash flow months (next year we hope!) are June, July, August and September so borrower will pay 1250 per month:

Remaining payments adjusted for Balance = 0

Final payment schedule:

A host of other possibilities and mixes are available including fixed principal payments, interest-only payments in between lump sum payments, extra lump sum payments over time, early payoff, etc.

Adapt the payment schedule to the true needs of our struggling entrepreneurs!

Calculating Interest Distribution to Investors in Complex Participation/Syndicated Loans, Pools or Funds

Maximizing Investor Returns / Reducing Risk through Participation/Syndicated Loans

Investors are constantly looking for new ways to maximize their returns. Investing in higher risk private loans is a method to generate 10 to 20% + annual returns. Of course, one of the objectives is to reduce risk and this can be achieved when multiple investors participate in a loan.

In higher-value commercial loans, bridge loans, loans for entrepreneurs (for starting or expanding a business) and short-term tax credit loans, many investors can participate or pool their investments to finance larger projects. Funds based on industry or loan product or investor pools are often created to reduce the risk of each investor while offering maximum flexibility.

Some loan funds and loan pools allow the investor to invest into or divest from a fund/pool/loan before the loan comes to maturity. An investor can decide for example to invest in a loan when the real-estate project reaches a specific milestone or divest when he/she feels there is a better opportunity elsewhere (usually divest to another fund within the same finance company as opposed to a complete withdrawal).

Again, to minimize risk and reduce cost to the borrower, in some loans, notably, construction loans, principal is extended progressively to the borrower only as required and contingent on achieving project milestones. These new principal advances are financed by existing or new investors that can join a loan or fund. This obviously adds to the complexity of calculating the distribution of income to investors.

Revenue models for the investor vary greatly: some Fund Administrators will pay the investor no matter if the borrower pays or does not pay the accrued interest every month (revenue based on accrued interest) and others will only pay the revenue portion to the investors if the borrower pays at least the accrued interest (revenue based on cash received). Whether based on accrued interest or cash paid, the revenue must be redistributed to each investor on a pro-rated basis of his investment amount and participation time (number of days or months of participation).

The Impossible Job of Interest Distribution to Investors

With this flexibility though, comes a major headache for Fund Administrators who must manage the revenue (interest revenue) for each investor based on the amount invested and on the time period this investor was involved in the loan.

Not many software tools can deal with such complexity, and although spreadsheets can be created to solve part of the problem, the time required to compute accrued or paid interest and investor distribution can take days, not to mention the great chance of error.

Calculating the interest in participation or syndicated loans is one piece of the equation, preparing statements is the next phase, a long and arduous process without the proper tools.

Investor management software to the rescue!

Yes there are solutions out there! Margill Loan Manager, a world-class software product, sold in over 40 countries, offers a highly sophisticated Investor module specifically created to manage irregular investments, divestments, payments and of course calculate revenue distribution by investor.

Let’s do a example and throw in a few curve balls…

Borrower ABC Inc. is given a credit facility of 1,250,000 (could be $, £, €, no matter) at a rate of 12% annually for 12 months. Investors in the participation/syndicated loan receive this return too.

  • If investors were to receive a lower return than the rate charged to the borrower, then this lower rate would be entered or, when reporting, a special custom report or statement could be created to factor in the spread or revenue for the Fund Administrator.

We will be using Compound interest, compounded monthly (we could have used Simple interest or compounding at another frequency (annually, semi-annually or other). We will also be using the banking method called the Effective rate method. Day count will be the most precise: Actual/Actual – could have been Actual/365, 30/360 or Actual/360.

ABC must pay accrued interest every month.

  • First draw of 300,000 on Feb 2, 2019
  • 5 investors wish to finance this first draw:
  • Fund A: 90,000
  • Fund B: 75,000
  • Fund C: 55,000
  • Fund D: 40,000
  • Fund E: 40,000

Initial loan advance of 300,000:

First interest payment on March 1, 12019. Total accrued interest is 2892.34. The accrued interest and individual investor portion is automatically calculated. We allocate to All Funds (investors in this case). Interest is prorated to each investor.

These interest payments can also be mass posted through the Post payment tool (see below).

Special event:

  • Fund C: Withdraws 25,000, April 12
  • Fund A: Replaces Fund C for 25,000, same day

Reallocation from Fund C to Fund A:

May 1 and June 1 interest payments are posted with the Post payment tool. This tool can post interest payments for a single or hundreds of loans, in seconds.

We can see how the 3003.24 interest payment was applied. Reports can show full portfolio totals for each investor/fund:

The Borrower makes a second draw (the operation is not shown in the images below since method was explained in example above…):

  • Second draw of 250,000 on June 17, 2019
  • Fund E: 100,000
  • Fund F: 100,000
  • Fund G: 50,000
  • Fund C: Complete divestment (30,000) July 2
  • Fund E: Replaces Fund C, same date

Borrower inherits from a rich uncle and pays back 65,250 on July 25. Outstanding interest is first paid back, and the balance pays the principal. The payment could also have gone 100% to principal with the “Principal Only” option.

On the lower part of the window, one sees the distribution by fund. Notice Fund C had a 0.00 principal balance but a 10.02 interest balance that will get paid off with the 65k payment.

Finally, rich uncle did not leave enough to ABC so there’s a need for more money (operations for adding draws an interest payments are not shown since we are now experts at adding these):

  • Third Draw of 600,000 on October 3, 2019
  • Fund A: 200,000
  • Fund E: 150,000
  • Fund H: 175,000
  • Fund I: 75,000

For the November 1 payment that was supposed to pay the accrued interest (10,506.48) ABC can only pay 1000 (see bottom portion).

The December 1 interest payment would then be much higher to pay the outstanding and current interest for a total interest payment of 20,479.77.

Construction is now complete and on Jan 18, 2020 ABC decides to pay back only 250,000. Fund Administrator decides that Fund A should get paid back first.

Outstanding interest (1653.76) is first paid to Fund A exclusively:

The remaining payment balance, 248,346.24 is then paid to principal to Fund A exclusively (use the “Principal Only” option):

And finally, the full loan is paid off on February 14, 2020. All interest is paid to the investors as well as the principal bringing the loan balance from 844,402.41 to 0.00 with the Payoff button:

Final schedule:


Multiple other options are available in the module such as:

  • Non-cash principal and interest Adjustments
  • Non-cash partial or complete P&I Transfers OUT of old loan and IN to new loan
  • Bad debt

A loan can include dozens of investors and a portfolio hundreds of investors.


The reporting module allows the production of reports at any date and for any time period for all investors/funds:

  • All transaction types (principal advances, cash payments, reallocations, transfers, adjustments, bad debt)
  • Principal balances
  • Interest accrued
  • Custom-built statements

The reports are produced as spreadsheets (Excel) or PDF.


Note: This module cannot include fees. It is meant to calculate the return to each investor. A second loan type for the borrower interactions, could include extra fees (origination, points, automatic penalties, etc.).


For more information on this very special module, please contact Margill Customer support: support@margill.com or call at 450-621-8283.

Margill Loan Manager – Ageing report – with refinanced loans

Q: If a loan was refinanced and the payments revised based on the refinanced balance, can the loan account still be in arrears?  Doesn’t the refinancing and revised payments take into consideration any prior arrears? 

A: Arrears are always a little tricky with refinanced outstanding amounts since a human must take a decision as to whether the new payments to be added are simply extra payments or are to compensate for the unpaid payments in the past. The examples will help…

A most important column in the schedule is the “Expected Pmt” column. This column indicates how much was expected for this line and subtracts the actual payment amount from this amount to generate the Outstanding amount.

  • On 07-06-2018 I was expecting 439.58 and got a 439.58 payment so Outstanding = 0.00.
  • On 10-06-2018 I was expecting 439.58 and got 0.00 so Outstanding = 439.58 and so forth

If an extra payment (unexpected in the normal scheme of things) is made, then the Expected Pmt should be 0.00 and the Outstanding is thus reduced.

If a loan is refinanced, you must make sure that as of this moment, your Outstanding amount gets progressively reduced to 0.00 and you do this with the Expected Pmt column in which you would put the Expected Pmt to 0.00 for the new payments that are added or changed to give 0.

In the above example, the loan is refinanced with lower payment amounts since the 439 was too high for the borrower – 6 payments were added and these now become 175.20 to reach 0.00. One could argue that these payments are extra and thus the Expec. Pmt should be 0.00 for each, so we manually change the Expect. Pmt to 0.00.

NOTE: In order to be allowed, to change the Expected Pmt amount, this must be allowed by the Margill Administrator in Settings:

As these new payment become paid over time, the Outstanding amount gets reduced…

If on the other hand, a second amount (new Advance) was lent to the borrower and extra payments were added, then I would not change my Expected Pmts to 0.00 since these new payments become part of the normal payments, in the normal scheme of things. So Outstanding is quite subject to interpretation…

I actually cheated below by entering 3 of the 12 new payments with Expected Pmt of 0.00 to bring my Outstanding back to 0.00. Outstanding must be 0.00 or greater, never less than 0.00 even if one could argue the borrower overpaid.

Automatic Margill Loan Manager emails – Gmail managed emails (G Suite / formerly Google Apps) are blocked

Q: I have set up automatic emails in Margill Loan Manager. We use G Suite for these but when I test the email connection if get a message saying the Google blocked the app since it is a less secure app. What can be done?

A: We see this once in a while when using GSuite.

Margill has no control over this since Margill simply sends a request to the Gmail (or other) SMTP server and this server checks your User name and Password and accepts to send the email or not. Pretty straightforward stuff, no big technology behind this…

However, GSuite or other mail providers may not accept the communication since it is sent by a software that they do not recognize and may give you a message such as:

You will thus have to allow your email account to communicate with Margill. Log into the G Suite Admin Console (https://gsuite.google.com). You must be the G Suite administrator. Go into security settings and click “Allow users to manage their own access to less secure apps”. Then go into your own Gmail settings and turn on the “Allow access to less secure apps (not recommended)”. Google will tell you a number of times that this is unsafe.

This should now allow the communication.

Setting up and Servicing Agricultural (Farm) Loans Efficiently

Setting up and Servicing Cash-flow adapted Agricultural (Farm) Loans Efficiently

Most farmers have special needs when it comes to their loans to buy land, equipment and other farm assets because of their seasonal cash-flow and income spikes. Therefore, agricultural loan products shouldn’t be set up like conventional personal or business loans or mortgages with regular fixed payments, but rather adapted to each farmer’s particular revenue and expenditure rhythms.

A crop farmer most often has greatest cash needs in late Winter (next season purchases), Spring and Summer and greatest cash income in Fall at harvest. Livestock farmers on the other hand, can usually generate steadier expense and income streams.

Depending on crop type and location of the farm (colder countries versus subtropical or tropical countries), there may be two or more harvest seasons. Harvests can be considered Good or Poor, adding yet another cash-flow need to be considered when setting up a loan payment plan.

Lines of credit offer much flexibility of course to the farmer, allowing to borrow and refund as needed.  When lines of credit are not available, for capital purchases for example, amortizing loans become the best option. Calculating a comprehensive, cash-flow adapted payment plan for the farmer can become so difficult with conventional calculation tools or spreadsheets, that small agricultural lenders simply cannot easily cater to their clients’ particular needs.

Margill Loan Manager makes lenders’ tasks so much easier with a what-you-see-is-what-you-get approach to creating the payment/amortization schedule based on an predicted cash flow.

We’ve also included an example of a short-term, bridge loans we often see in AG loans.


Example 1: Interest-only during low season with principal and interest during the harvest months

Step 1: Create loan with normal amortization

Let’s say this for only 24 months (could be years, no matter)…

Press on “Compute’ to create this normal P&I schedule which you can now adapt line by line or in bulk.

Step 2: Highlight the interest-only months (lines) and right click:

Step 3: Highlight the principal and interest (P&I) months to fully amortize (0.00 balance).

Get the proposed payment plan in seconds – notice below that the payments for the interest-only months (lines 14 to 20) have been recalculated automatically since lines 9-13 pay off principal thus reducing the accrued interest (this automatic re-computation is called a Line Behavior – a pretty sophisticated feature).

Notice the payment amount for line 1 (479.88) is higher since payment was over 1 month after the origination date (what is called a long period).

Example 2: Higher set payments during the high cash-flow months and normal amortization during the slow months

Once the preliminary schedule is calculated:

Highlight high revenue months, right click – let’s say the farmer can pay 4000 per month during these 5 months of the year. Margill will ask you to enter the payment amount for the selected lines.

Now select the remaining P&I lines and compute the payment to produce a 0.00 balance:

The resulting payment plan:

Example 3: Over time payments were made, missed and late, fees were automatically added and so another 6 payments are added to the loan as well as a new 20,000 loan approved on April 12, 2021

We first inserted a new line  – line 19 below – with the right mouse click or the  button in which we entered the 20,000 loan (called an “Add. Principal (Loan)” type transaction).  Then we added the 6 extra payments at the end of the schedule:

The payments after the 20,000 loan are then re-amortized (could have been special  lump sum payments in there too):

Below is the schedule containing the past payments and the future expected payments to fully amortize the loan that now stretches on to May 2022:

 

Example 4: Bridge loan to help farmers who are expecting to receive a state or federal grant. The grant only comes in (paid by the government) after the project is completed. Interest can be charged normally or a simple Fee charged since interest may be too low for 2-3 month loans.

In this example, we have a 10,000 loan for approximately 3 months (we estimate payment on August 1 – date can change later on):

The preliminary result after Compute:

I then must add my Fee (200) – I can add either a fee or consider this fee to be interest. You have both options in Margill with Line statuses.

Press on  to insert a line (or right click with the mouse):

Fees could be paid up front:

Or paid at the time of full repayment on August 12 for example (for accounting purposes, Fees must be paid separately from the principal so they are properly accounted for):

Some would like to consider the 200 as  interest so we use a Line status called “Interest Charged” and this shows in the Accrued Interest column:

We can split the payment in two or could have one payment of 10,200, no matter (either way, payment will automatically post 200 to interest first and 10,000 to principal):

or


As a agricultural lender you run into other scenarios? Please let us know and we’ll add to this blog! Write to support@margill.com or call at 1-877-683-1815 or 001-450-621-8283 and talk to Marc.

Loan Servicing with Excel? Pitfalls and alternatives

Loan Servicing with Excel? Pitfalls and Alternatives

I’m a great fan of Excel. I think it is the most important and useful software ever developed. I first started using spreadsheets many years ago with Lotus 123 which was a great tool that lost the spreadsheet war to Microsoft. Excel can be used in so many ways and here at Margill, we use Excel quite extensively.

Many, if not the majority of our users, before switching to Margill Loan Manager, serviced their loan/mortgage/lease/line of credit portfolios with Excel. Even among our very large clients, many used Excel to service hundreds of millions of dollars and it was doing a pretty good job. Excel is great because of its flexibility and its almost limitless power to manually adapt the loan to very peculiar scenarios.

Spreadsheets do however have major drawbacks and as the guy who guides clients in their migration from Excel to the Loan Manager, I have seen hundreds of workbooks and here are some of the drawbacks I have observed over the years:

1. Too many loans eventually: spreadsheet overload

Excel can do a decent job for a limited number of loans but eventually, the amount of data becomes too much and the loan payment schedules become impossible to manage. Finding data and updating becomes mission impossible.

2. Irregular loans and missed/late/partial payments

A major drawback in Excel is managing missed, partial and late payments. Excel can be fine when all normal payments are paid as they were planned, based on the loan contract (60 payments of $500 on the 1st of each month for example). When payments are not made as they should be, it becomes a real challenge to update so many spreadsheets. Updating a few dozen loans can take hours and a few hundred almost a day. Payment management should take minutes, not hours!

Excel is not ideal either for line of credit type loans or when payments are not set ahead of time. Try importing 500 new payments or draws (aka: advances/additional principal) on various dates for multiple loans. In my experience, this can only be done loan by loan in Excel, by hand, not as a batch operation. A good loan program allows easy import of these ad hoc payments or draws with an automatic re-computation of the interest in seconds.

3. Variable interest rates

For loans based on Prime or LIBOR for example, the fact that rates were very stable over the last couple of years made things more or less manageable with Excel. Now with base rates going up more regularly, updating loans in Excel represents a real challenge since updating the rates must be done manually on a loan-by-loan basis. A good loan servicing platform can update rates in batch.

We often see interest-only loans tied to a base rate in which, when the rate changes, the payments must be adjusted to remain interest-only. With any sort of volume, this becomes almost unmanageable in Excel since, in my experience, there is no way to easily tell Excel to adjust the payment to pay only interest. There’s probably a way to program a special macro to do this but again, not easy. Very few loan servicing software have this advanced option.

4. Data cannot be found easily

I often do screen shares with potential clients and simply finding a specific loan in the spreadsheet system is a challenge. Wrong folder, wrong spreadsheet, wrong tab. You know the feeling! Finding the right loan should take seconds, not a minute or more.

5. Calculation errors

This one is self-explanatory. Excel is wonderful software, but human error is a major problem with spreadsheets since they offer great flexibility but with flexibility comes risk of error. Many studies have been done over the years trying to evaluate the amount of money that has been lost (or gained by someone else) because of human error. The same risk of error exists for loan servicing via Excel.

See this interesting ZDNet article Excel errors: How Microsoft’s spreadsheet may be hazardous to your health

6. Charging fees when payments are missed

I’ve seen so many professional lenders include, in their contracts, a clause that states that fees are charged to borrowers for missed and late payments. Considering the challenge of adding fees in Excel, again, on a loan-by loan basis, these fees are simply not charged and end up as lost revenue for the lender and, even more importantly, the consumer not being penalized, does not change his/her bad habits.

High quality loan servicing solutions should have a feature by which fees are applied automatically for late or missed payments and to go one step further, should automatically advise the consumer a few days ahead of time by email or SMS that a payment is upcoming and to make sure the amount is available in the bank account (for electronic debits (ACH)) or to make sure the check is paid on time.

7. Obtaining financial data when you need it for the proper dates

A major irritant in Excel is obtaining the right financial/accounting data for a specific time period. Most companies will report on a monthly or quarterly basis based on the civil calendar month. In simple scenarios, when payments are due and paid on the 1st of each month, you can pretty easily obtain the interest and balances from the 1st to the end of month in Excel. However, not all payments are payable or paid on the first of each month or quarter. For example, a loan has set payments on the 7th of each month, yet I must report from the 1st of the month to the end of month. With such payments, Excel is simply not able to pull the accrued interest and balances for a calendar month (or quarter, or year) unless a line is inserted at the end of the month that splits the interest in two time periods (from the 1st to the 7th and the 8th to 31st for example). Adding such lines in hundred of loans would lead exhaustion or worse!

Quality loan servicing software don’t need these “reporting” lines since the calculation engine will automatically simulate start and end of month, allowing you to pull any data, any time for any time period.

7a. Distinguishing between accrued interest and paid interest

Along the same lines as 7 above, Excel does not easily distinguish between accrued interest and paid interest. In most spreadsheets I’ve seen, there is only one “Interest” column that is computed with a simple interest or compound interest formula. Even if a payment is missed, the interest accrues but is not paid.

In a properly designed spreadsheet, this unpaid interest should go, not only to the loan balance column, but also to a due (outstanding) interest column, that, in most cases, based on a standard refund order, should (must) be paid before any principal is paid. Throw in fees and the spreadsheet turns to disaster because a refund order is non-existent. This greatly increases the work for your accountants after the fact.

8. Loss of one day’s interest and inclusion/exclusion of start/end day

This is my favorite which I have seen countless number of times particularly for end-of-month payments.

You must ask yourself, if a payment is made on December 31, is it paid in the morning, so at 0:00 in the morning, or is it paid at the end of that day at 12:00 midnight (24:00)? Nobody actually asks this question since the payment is simply paid at some time during the day (10 AM, right after lunch, at 4 PM, who knows, who cares…). Nobody enters the time at which a loan or payment is made since interest is not calculated on a hourly basis, but on a daily basis. Software must then assume that a loan is disbursed or a payment made either at the start of day or end of day (to factor in a full 24 hours or interest).

Industry standard dictates that when a loan is disbursed, interest is calculated on the day the money is lent out but not calculated for the end date. So, for a loan starting Feb.1 (with first payment March 1) and with a final payment 12 months later, interest would start on Feb 1 at 0:00, but no interest would be charged on the loan end date of Feb 1 (payment 12). Even with a loan balance, the interest reported on the loan end date would be 0.00. A silly, but easily understood way to look at this: a loan lent out on Feb. 1 and paid back Feb. 2 would have 1 day’s interest, not 2. A loan from Feb. 1 to Feb. 1 of that same year, well, would probably not have any interest. How many days are there from Feb 1 to Feb 1? In my book, zero.

So a payment on December 31 is actually paid at the start of the day, not at midnight. I call this time 0:00+. In Excel, if Dec. 31 is entered as the payment date, you may have wanted it to be paid at midnight but it is in fact paid at 0:00+ and thus should reduce the balance by that amount at the start of the day, not at the end of the day. The balance reported on that payment line in Excel is thus that on the 31st at 0:00+, not 24:00. The same applies for the interest calculated: also on the 31st at 0:00+, not at 24:00. Thus, by relying on that line’s payment, the accrued interest for that last day (the 31st) is simply ignored and the balance is not accurate to the 31st at 24:00. To obtain the right amounts in Excel, a line should be inserted in the sheet on the 1st of the next month to compute the interest accrued on the 31st. Again, adding extra lines becomes practically unfeasible with a few dozen or hundred loans in Excel. And with every extra operation comes an increased risk of error.

Your 2 cents…

You have run into spreadsheet problems with your loans? Let me know, I’d be happy to add them to my blog.

Want to replace Excel as your loan servicing software?

You have had enough of Excel for your loans, there are many good loan servicing solutions out there, and, well, its my job as a Margill employee, to “objectively” ? recommend our product, Margill Loan Manager… It offers a whole lot of flexibility and accuracy!

How to obtain the daily interest amount (per diem) in Margill Loan Manager

Q: How to obtain the daily interest amount (per diem) in Margill Loan Manager?

A: This can be added very easily through a simple Mathematical Equation. 

Go to Reports > Equation Management and click on  

  1. Name the Equation
  2. Select the two required fields (balance and interest rate) from the various themes on the left
  3. Add the operators with the  button
  4. Divide by 365 days with the  button
  5. Save

You can now use this simple interest Equation in various reports picking it up in the Equations theme:

Record List Customized:

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Interest-only: Regular monthly interest vs. Exact day interest

Question:

My company does interest-only 12 month bridge loans calculated in two ways.

  1. Payments are based on the number of days in a month with a balloon payment at the end (so payments change depending on the month)
  2. Each of the 12 payments is equal with a balloon payment at the end.

Can these two calculation methods be done in Margill?

Answer:

Yes.

In Simple interest, Margill will usually use the exact number of days in a month and in a year to compute the interest. The Day count would be Actual/Actual (or Actual/365 or Actual/360).

If the interest is to be the same every month, the use the 30/360 Day count which simulates months that are of the same length.

For Compound interest (what is called the Effective rate method – the banking method), there is an extra  calculation method option that calculates using the exact number of days and another that splits payment in equal periods. The Day count does not have to be used to “artificially” simulate the equal periods.