Default Same-As-Cash Process
Audience: Loan Servicer or Collector, Loan Servicing/Collections Managers, Administrator, Compliance
Some lenders may want to offer loans with an interest-free introductory period or same-as-cash period. This introductory period is used to attract more borrowers. If the loan is not paid off in the same-as-cash period, they usually want to apply interest retroactively to the start date of the loan and have the loan act like a more traditional installment loan from that point. The default same-as-cash process will accomplish this.
This article will cover the default same-as-cash process, and some common use cases for the process.
How the Default Same-As-Cash Process Works
The default same-as-cash process is relatively simple:
- A loan is set up, added to the "Promo - Current" portfolio, and the expiration date of the promotion period is entered into the "Promo Period Expiration Date" custom field.
- During the promotional period, the loan will accrue interest as usual. The interest will be taken care of later if the borrower pays off the loan within the promotional period.
- At the end of the promotional period, if the borrower has not paid an amount greater than or equal to the total loan amount, the loan is moved out of the "Promo - Current" portfolio and put into the "Promo - Promo Period Expired" portfolio.
- If the borrower has paid an amount greater than or equal to the total loan amount, a credit is applied to the loan to completely pay off any remaining amount (there is typically a remaning amount because, by design, the borrower hasn't paid interest, but interest still accrued).
- Once the account has been paid off for more than five days, it is moved into the "Paid Off - Paid in Full" loan status. It is also moved out of the "Promo - Current" portfolio and moved to the "Promo - Paid Off" portfolio. AutoPays are suspended and the credit status is set to 13 (this is the correct reporting status for paid-off loans).
- If the customer has overpaid the original loan amount, the loan is assigned to the "Promo - Manual Review Needed" portfolio.
This is the default process and can be changed. The biggest difficulty with same-as-cash is accounting. The typical accounting concerns include:
- If interest is suspended during the promotional period, how can it be applied retroactively, without changing closed accounting periods. This concern is the reason why the default same-as-cash process will accrue interest normally and charge it off if the loan amount is paid back during the promotional period.
- If interest accrues, but is later charged off, accounting revenue numbers will change (and payments may need to be reapplied to principal) if the loan is paid off during the promo period.
Common Uses & Questions
The most common use case for this process is as outlined above. The loan gets set up, interest accrues, payments are made that apply to principal and interest. At the end of the promotional period, if the total amount paid is greater than or equal to the orignal loan amount, the loan will be charged off. Some customers do things in a more complicated way. They may apply all payments during the promotional period directly to principal. They may suspend interest during the promotional period and the remove the suspend at the end of the promo period if the loan isn't paid off.
All these use cases will work, but each has its own associated problems. However, regardless of the specifics of how it works, the driving factor behind same-as-cash is to attract borrowers. Usually same-as-cash borrowers are buying a specific product against which the loan is given, which also helps drive sales.
When should I offer a same-as-cash option? Offering this option is a business decision, so you should only offer it if it makes sense for your business. If it will significantly increase the number of your borrowers, or significantly drive sales of the product the loan is given on, you may want to consider it.
Some topics related to the same-as-cash process may interest you including:
If you are in the process of making configuration decisions for you lending company, you may want to check out the Create New Loan - Standard Method article.