● Overview

● Declining Balance - Recalculation Methods

● Declining Balance Equal Installments - Recalculation Methods

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#### Overview

When a client makes an early repayment on a loan using the dynamic method, you can choose whether to recalculate the repayment schedule or not.

Mambu supports different recalculation options which you can choose from, based on your internal operations and the Interest Calculation method used. See below more details.

For Declining Balance interest method:

- No Recalculation
- Reschedule Remaining Repayments
- Recalculate the Schedule, Keep the Same Number of Terms
- Recalculate the Schedule, Keep the Same Principal Amount

For Declining Balance Equal Installments interest method:

Prepayment Allocation - On Next Installments- "Full Due is Paid (on/after Due Date"
- "Principal Expected is Paid (before/on Due Date"

- Reduce Amount per Installment
- Reduce Number of Installments

When creating a new loan product, you will need to choose one of these methods which will then be associated to that product and to all the accounts created under it.

Next you can see how the schedules would look like for each of the methods, based on the Interest Method used.

The loan details for every example are:

- Amount: 1000
- 6 installments
- Principal Payment Interval: 1
- Interest Rate: 10% charged per year
- Installments Frequency: Every Month
- Disbursement Date: 21/01/2017
- Today's Date: 21/03/2017
- 360 days in year

Under each recalculation method and each Interest method you will see how the repayment schedule would look like for each method, assuming there is a repayment of 600$ - knowing the due amount in the 21st of March is just the sum of the first 2 installments, therefore there'll be a pre-payment of the remaining amont.

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#### Declining Balance - Recalculation Methods

Based on the product setup mentioned, this is a how the schedule would look like one month after disbursal and without any payment made yet:

Below you can see the behaviour of each recalculation method:

*No Recalculation *

With this method, there will be no changes in the original repayment schedule. The repayments will remain as if the 600$ were paid on the due date.

Both the repayments due in Feb and Mar are paid, and without any interest accrued after March 21, the remaining amount will be used to pay the principal of the third installment (the total amount of the principal) and a partial amount of the 4th installment.

The remaining installments will still display the same amount as in the original schedule.

*Reschedule Remaining Repayments*

With this method, the expected principal amounts of all the upcoming repayments is reduced equally by the pre-payed amount.

In the image above you can see that the first and second repayments are paid. The third installment's principal is also paid and because there was no interest accrued Mambu considers the installment as totally paid. The remaining amount will still be used to pay part of the 4th installment's principal. The remaining repayments are recalculated.

*Recalculate the Schedule, Keep the Same Number of Terms *

With this method, when there is an overpayment as in this scenario, the next repayments will be recalculated based on the resulting principal balance.

If instead of an overpayment, there had been a partial pre-payment, the remaining schedule would not be recalculated.

*Recalculate the Schedule, Keep the Same Principal Amount*

With this method, when there is an overpayment, the next repayments will be recalculated based on the resulting principal balance and the repayment is allocated first on the due installments. When the due installments are paid, the number of installments is reduced by allocating the remaining amount on the Pending installments at the bottom of the schedule and marking as Paid when the Principal Expected is covered.

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#### Declining Balance Equal Installments - Recalculation Methods

In order to choose the prepayment recalculation method the Prepayment Allocation must be selected first: you can choose whether a prepayment is allocated on the next pending installments or all the amount is allocated to the current installment only.

Prepayment Allocation - On Next Installments

- "Full Due is Paid (on/after Due Date"
- "Principal Expected is Paid (before/on Due Date"

Prepayment Allocations - On Upcoming Pending Installment Only

- Reduce Amount per Installment
- Reduce Number of Installments

Based on the same account setup, this is the original schedule for an account using Declining Balance Equal Installments method.

*Prepayment Allocation - On Next Installments*

- Full Due is Paid (on/after Due Date)

With this method the prepayment is allocated to principal on the current and next installments, however the current installment will be marked "Partially Paid", as there remains interest to be accrued until the due date, therefore requiring the client to return to the bank branch to perform a payment for the interest that will be accrued at due date.

*Prepayment Allocation - On Next Installments*

- Principal Expected is Paid (before/on Due Date

When using this method, the prepayment will be allocated to principal on the current and next installment, but the current installment will be marked "Paid", since Principal was covered and interest is recalculated in the next due installment, therefore not requiring the client to return at the bank branch at due date to repay whatever interest was accrued since the prepayment.

*Prepayment Allocations - On Upcoming Pending Installment Only*

- Reduce Amount per Installment

This method allows for the amount per installment to be reduced when a prepayment is performed, therefore keeping the original number of installments. When making a prepayment, once principal is covered on the next due installment, it will be marked as paid and the extra interest to be accrued will be recalculated in the next installment. This will ensure that the client doesn't need to come back to the bank on the due date, just to pay a portion of interest.

*Prepayment Allocations - On Upcoming Pending Installment Only*

- Reduce Number of Installments

This method allows for the number of installments on the account to be reduced when a prepayment is performed. When the prepayment is performed earlier than the expected Due Date and if the Principal amount is covered, then the installment is marked Paid and the remaining un-accrued interest will be recalculated in the next installment. Using this method, the principal due can be reduced to zero in a way that the loan account may be paid off early.

In the above scenario, the $600 prepayment is allocated fully on the current installment, in our case the first on the schedule. Since Expected Principal was covered the installment is marked Paid and the remaining interest, is recalculated in the next installment. Since the repayment amount was considerably higher than what was expected, the last two installments on the schedule are completely reduced.

*Optimized Payments - Additional Option*

When using instead of the Standard Payments the Optimized Payments method, we have an additional option for Reduce Number of Installments Method. You can select to mark installment as Paid when the Principal is covered, as described above, or the additional option to mark as Paid when Original Expected is covered:

When this option is enabled and, at account level, when a customer performs a prepayment and when the originally expected due amount is covered, then the installment is marked "Paid" and the remaining to be accrued interest will be recalculated in the next installment.

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