The first payment is applying entirely toward interest!

Handling payments and adjustments, running reports, doing your accounting with Moneylender.
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The first payment is applying entirely toward interest!

Post by wtech_josh »

You create a loan and add some payments. The first one or more payments on the loan are applied entirely to interest and no principal. What's happening?

It's usually one of two things… In the Loan Wizard, you have the choice to have interest on the payment schedule (like most mortgages and car loans), daily interest (interest is calculated based on the number of days from payment to payment – later payment means slightly more interest overall, earlier payment means slightly less), or interest on a separate schedule.

You put the loan into or out of daily interest mode from the Settings tab > Loan Settings > Loan Engine – Amortized vs. Amortized with Daily Interest. The interest on payment or separate schedule can be changed on the Settings tab > Interest section > select the interest rate and click the Edit (pencil) button. If the loan is Amortized you’ll see the “Follow payment schedule” checkbox, and an option to set the frequency of interest calculations when that box is unchecked.

If you choose daily interest, and the payments arrive, say, a week after the due date, there will be an extra seven days of interest – which might make the total interest earned higher than the amount of the payment received. Switching the loan engine to amortized will make the interest happen on the due dates, so the extra week of interest isn’t yet earned on the loan when applying the payment.

The second thing is a common situation at the beginning of loans that are originated mid-month and the first payment is due more than a month later. For example, originated on February 15th with the first payment due April 1st. That’s a month and a half of interest that is earned before the first payment is due. If the payment was $1000, it might normally be $900 in monthly interest and $100 in principal. If there’s an extra half month of interest – around $450 – then the first payment pays $1000 of the $1350 total earned interest. And it’ll take another three months or so to chip away at the rest of that $450 in $100 increments before the payments begin to touch the principal. Often, a “payment” for the partial months interest is collected when the loan is originated, and you would record it as a payment on the loan with the payment type set to “Prepaid Interest and Fees” to tell Moneylender that the partial interest and any origination fees were paid by the borrower when the loan was created. This prepaid interest payment would pay down that extra interest so the first “regular” payment will pay some principal.
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