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Declining Balance Interest Calculation with Equal Principal Installment.
Status: Active, included in v1.1 release - functional specifications to be updated for v1.1
Updates:
01 Nov 2007 - Soham Dhakal (soham@magnus.com.np) - Initial Release 04 Nov 2007 - Soham Dhakal - Added Clarification for Grace and Interest Recalculation
Feature Summary
This feature would allow MFIs? to create loan repayment schedules with equal principal installments and interest based on the declining balance formula.
Background
Mifos currently supports two types of interest calculation; Flat and declining balance with both resulting in Equal Monthly Installments (EMI). This feature would allow MFIs? to calculate interest using equal principal installments, and simple declining balance formula to calculate the interest. This means that the borrower would have to pay equal installments of principal for the duration of the loan, and the interest would be calculated on principal that has not been paid for the loan period.
Formula Interest = (P-Pp) * r * n
Where,
P = loan amount
Pp= Principal paid
r = rate of interest
n = term of loan
The following example illustrates this:
Principal = 15,000
Int. Rate = 25 %
No of payments = 25
Payment schedule (Every 2 weeks) = 14 days
Principal = 15,000/25 = 600
| Installment | Principal | Interest | Total |
|---|---|---|---|
| 1 | 600 | (15,000 – 0)*0.25*14/365 = 143.83 | 743.83 |
| 2 | 600 | (15000-600)*.25*14/365 = 140 | 740 |
| 3 | 600 | (15,000 – 1200)*.25*14/365 = 132.32 | 732.32 |
| Repeat |
Business Need for feature
This feature is needed for deployment of Mifos in Nepal since a lot of the MFI’s (based on Grameen Model) use this method to calculate interest. The rationale behind this: because of the simple nature of calculating the interest the clients can see that the principal they are paying is actually reducing their interest.
FEATURE DESCRIPTION
This feature does not require any UI changes, and the user does not interact directly with the feature. The system does the necessary action based on the user setting.
The following Use Case(s) and Business Rules are impacted:
Use Case: Initial Configuration
- An “Equal Principal Declining Interest” type of loan calculation method will be added as an option to the types of interest calculation, (currently FLAT, DECLINING)
** Note**: The actual naming convention needs to be decided eg. EPPDECLINING?
Use Case: Define Loan Product
| Actor | System |
|---|---|
|
|
Business Rule: Loan Repayment and Interest Calculation
The following additional logic is needed in the Loan Repayment and Interest Calculation:
Calculate the Principal per Installment
- PPI = Total Principal/ No of Payments
Interest Per Period = (P-Pp) * r * n Where, P = loan amount Pp= Principal paid r = rate of interest n = term of loan
Considerations and Assumptions
The following considerations have to been accounted:
- The “Grace” functionality will be applied to this type of calculation.
Grace on All payments -- No Principal or interest due on the first 3 payments. EPI = 15000/(25-3)=681.82. So the remaining 22 payments would all have princpal 681.82 and interest would be calculated based on number of days for the remaining principal for each of the installments
Principal only Grace There would be no principal due on the first 3 payments, but the interest due would be 143.83 for each of the 3 payments. EPI = 15000/(25-3)=681.82. So the remaining 22 payments would all have princpal 681.82 and interest would be calculated based on number of days for the remaining principal for each of the installments.
- The ability to pay the principal in last payment will not be allowed. This functionality will be disabled if the user selects Declining Interest - Equal Principal Installment.
- The interest will not be recalculated for missed payments.
Questions/Issues
- Should this feature be a subset of “Declining Balance”? E.g.
- Declining Balance -> Equal Monthly Installments
- -> Equal Principal Installments