The typical way that payments are calculated doesn’t take into account irregular first payment periods. Because of this, if your first payment period is longer than a standard period, you will most likely get an extra payment period at the end of the loan to make up for the extra interest accrual in the first period. If the first payment period is short, you will most likely have a final payment that’s less than the other period payments.
You may want all of the payments on a loan to be for the same amount. LoanPro has an option that makes this possible. The Smooth Payment tool utilizes both the Schedule Roll and the Schedule Round to make all payments an equal dollar amount. If you have a large balloon payment at the end of the schedule, the system will smooth that large payment out over all the others. If you have a small payment at the end of the schedule, the system will take a portion of all the earlier payments and move it to the final payment.
There is no simple mathematical formula for this, so LoanPro uses an iterative method to test payment amounts until it arrives at the correct amount. Therefore, it may take some time to perform a smooth operation when calculating a loan.
Using Smooth Payments
The smooth function can only be used in Account Setup > Setup Terms inside of inactivated accounts.
As an example, let's say we have a $10,000, 24-month loan with a 29% interest rate. The loan has a monthly payment frequency and a $100.00 underwriting fee. If the first payment period is 45 days long—depending on our settings—it’s likely we’ll end up with a payment schedule that is something like the following:
24 monthly payments of $559.53 and 1 monthly payment of $213.81
The extra payment at the end is necessary so that all of the interest accrued and the principal balance are completely paid on the loan. If you would prefer the payment amounts on the loan be uniform, you can click the 'Smooth' button under 'Schedule Tools.'
There are three Smooth options, and here is a breakdown of what each does:
- Smooth Payment Advance – Smooths the payment amount over the number of periods you entered for the loan. The Smooth Payment Advance tool will only work with a whole-number loan term.
- Smooth Payment Basic – Smooths the payment amount over the number of periods that is most simple for the system to calculate. This option should take less time.
- Smooth Payment Advance – No Round – Smooths the payment amount over the number of periods you have entered for the loan without applying a schedule round. This setting will only work with a whole-number loan term.
In the case of our 24-month loan, if we use the Smooth Payment Advance, we should get a payment schedule of 24 monthly payments of $565.42.
It’s important to note that the payment amount will not work out perfectly. One penny added to each payment of a 24-month loan means that by the end of the loan, the customer will have paid an additional $0.24 on the loan. Also, the loan will not accrue interest on the extra money paid. This means that no matter what payment amount the system calculates, the total amount paid will likely be slightly different than the total interest and principal. Because of this, the Smooth Payment Advance option will usually round a small amount off the end of the loan to make the last payment uniform.
To see the round amount, navigate to the Advanced Configuration section of the Setup Terms tab.
The Smooth Payment Basic option, on the other hand, was designed to accommodate contracts from less sophisticated systems. Some systems merely add (or subtract) the difference in interest for an irregular first period to the loan amount and then use that amount to calculate the payment amount. This is precisely what the Smooth Payment Basic feature does. It does not automatically implement the schedule round to remove the last payment, but you can do this manually. Though, this may not be necessary depending on which system generated the contract in the first place.