Overview
This article aims to provide a clear and comprehensive description of the Default functionality, explaining how the payment is calculated while in default and the effect of the settings in the loan default status.
Default Trigger
The loan settings determine the default trigger.
Default After: This setting defines the specific number of days after which a loan is considered in default. The count starts the next day after the missed payment date.
Default Days Method (Business Days or Calendar Days): Lenders can specify whether the 'Default after X Days' is calculated using business days or calendar days, offering precision in alignment with typical business operations or a straightforward calendar-based approach.
Effective Until (Current or Maturity): This parameter determines the duration for which the default settings are applicable.
'Current' is the default rate that is effective until the loan becomes current.
'Maturity' means the rate remains in effect until the loan is paid-off.
Default Rate Method (Fixed Rate or Modifier): This setting dictates how the default interest rate is determined. A 'Fixed Rate' sets a specific interest rate for defaults, while a 'Modifier' adjusts the interest rate by the 'Default Rate'.
Distribute to Investors (Yes, No): Lenders can choose whether to distribute the excess payment related to the default to investors or not.
Start Default (Default Date or Next Due Date): This setting determines the starting point of the default status. 'Default Date' initiates the default status from the missed payment date, while 'Next Due Date' starts it from the following scheduled payment date.
Default Rate: This is the rate or rate modifier to be applied while the loan is in 'Default'.
Default Calculation Rule
When Effective until 'Current'
The fundamental rule for default status is that a loan retains its default status until it becomes current. This means that even if payments are made, the loan will not revert to a non-default status until after a payment moves the paid-through date to the current due date.
When Effective until 'Maturity'
The loan retains its default status until the loan is paid in full, even if payments are current.
Case Study: January 5th Payment
Case Study: January 5th Payment
To illustrate this rule, consider a scenario where a payment is made on January 5th. If this payment covers all overdue amounts up to January 1st, bringing the loan current, the software will automatically update the loan status after receiving the payment.
Status Update Mechanism
Once the payment recorded on January 5th is verified to bring the loan current (i.e., all dues up to January 1st are cleared), the software performs the following actions:
Removal of Default Status: The loan's status is updated from 'default' to 'current'. This change is automatic and reflected immediately in the system.
Interest Rate Reversion: Concurrent with the status update, the interest rate on the loan reverts to the pre-default rate. This ensures that the borrower is no longer subject to the higher interest rates typically associated with default status.