First Period Days

Introduction

Often when a loan is made, the first payment period (period starting when the loan is given until the first payment comes due) is a little longer or a little shorter than a standard payment period. LMS allows you to specify how you’d like the system to calculate interest accrual for this first payment period.

Actual

The system will automatically default to the Actual option if the Days In Year setting is set to Actual. The actual option will accrue interest in the first period for the actual number of days that are in the period. So, if payments come due monthly then a standard monthly period is 30 days. If your first period is actually 25 days long, only 25 days worth of interest will accrue in the period.

Interest Accrual Using Actual Days in Year
Monthly Actual Example
A loan will accrue 1/365th (1/366th for leap years) of the total interest each day. So, a loan with a 25% interest rate accrues 0.0685% (calculated as 0.25/365) interest each day.

On a $10,000 loan with a 25% interest rate, if the first period contains 45 days, the total interest that accrues will be 25% divided by 365 days multiplied by 45 days multiplied by the $10,000 loan balance. This gives (25%/365) x 45 x $10,000 or $308.22.

Weekly/Bi-Weekly Actual Example

When payment frequency is monthly, each payment period may have a different number of days. When payment frequency is weekly or bi-weekly, each payment period has 7 or 14 days respectively. Because of this, first period days using a frequency-specific or actual days in year look the same.

For a $10,000 loan with a 25% interest rate and a weekly payment frequency, daily interest is calculated as:

$10,000 x (.25/365). this gives $6.85 worth of interest per day. If the number of days in the first period is 12, this gives total first-period interest of $6.85 x 12 or $82.20.

It's important to note that if the first period starts on the 1st and ends on the 7th, this is only a 6-day period, because the period interest is not inclusive of the last day. Interest accrued that day will be a part of the interest for the next payment period.

Force Regular

The force regular option lets you tell the system that regardless of the number of days in the first period, the system should calculate it as if it has the same number of days as a standard period. So, for example, if payments come due monthly, a standard payment period is 30 days long. If your first period is only 25 days long, 30 days worth of interest will still accrue in those 25 days if you choose the force regular option.

If this option is chosen in combination with a Between Periods Interest Application and a Frequency Days In Year selection, and you change the due date for any payment periods, the amount of interest that will accrue during those periods will still be equal to the amount that would have accrued in a payment period of a standard length (e.g. 30 days if the payment frequency is monthly).

Frequency

The frequency option will view the first period as being the same length as a standard period for monthly and semi-monthly periods if it is within 1 or 2 days of the length of a standard period. If payments come due monthly, then a standard payment period is 30 days long. If the payment period is semi-monthly, then the standard payment period is 15 days. If the first period on a monthly loan is actually 31, 29, or 28 days long, 30 days worth of interest will accrue in the first period. If the first payment period on a semi-monthly loan is actually 13, 14, 15, 16, or 17 days long, 15 days worth of interest will accrue in the first period.

Interest Accrual Using Frequency-Specific Days in Year
When calculating interest using a frequency-specific number of days in the first period, every month is equal. For example, if the annual interest rate for a loan is 25%, the monthly rate can be calculated as 25% divided by 12 or 2.0833%. To calculate the daily interest rate, simply divide the monthly rate by the number of days in the month. For example, January would have a daily rate of 2.0833% divided by 31 days, or 0.0672% each day, while February would have a daily rate of 2.0833% divided by 28, or 0.0744% each day.

Monthly Frequency Example

If you have a $10,000 loan with a 25% interest rate and a 45-day first period that starts on January 1, the interest that accrues in the first period will include 31 January days and 14 February days. Using the calculated daily rates for January, we accrue 25% divided by 12 divided by 31. Then we multiply it by 31 days and $10,000. Here's the whole thing written out: (25%/12/31) x 31 x $10,000. Completing this equation results in $208.33.

For February, we get 25% divided by 28 days in the month, then multiplied by 14 days and multiplied by $10,000. This is written as (25%/12/28) x 14 x $10,000 and equals $104.17.

If we add the interest together, we get a total first period interest of $208.33 + $104.17 or $312.50.

Weekly/Bi-Weekly Frequency Example

When payment frequency is monthly, each payment period may have a different number of days. When payment frequency is weekly or bi-weekly, each payment period has 7 or 14 days respectively. Because of this, first period days using a frequency-specific or actual days in year look the same.

For a $10,000 loan with a 25% interest rate and a weekly payment frequency, daily interest is calculated as:

$10,000 x (.25/364). this gives $6.87 worth of interest per day. If the number of days in the first period is 12, this gives total first-period interest of $6.87 x 12 or $82.42.

It's important to note that if the first period starts on the 1st and ends on the 7th, this is only a 6-day period, because the period interest is not inclusive of the last day. Interest accrued that day will be a part of the interest for the next payment period.

Unit Period Odd Days

The Unit Period Odd Days is the last option. Interest in full periods is calculated using the payment period interest rate (e.g. r/12) and odd-days interest is calculated using the daily rate (e.g. r/360 x # of odd days). Unit periods are actual months, so January 10th to February 10th is one unit period, and even though it is 31 days, the interest is calculated as a standard frequency period of 30 days.

It is important to note that for first periods that span from February to March, the unit period will be 28 days (29 days in leap year), and will be calculated as a standard frequency period of 30 days. So, a first period from February 12th to March 14th, which is 30 days, will be calculated as 1 period plus 2 odd days.

It's common for loan payments to be calculated using one option for days in the first period, but a different option for how interest actually accrues. Many contracts will calculate the payments using a method that works like the Force Regular option in LMS, but accrues interest using a method that works like the Actual option. Depending on your region, there could be regulations prohibiting this, but in any case you should be aware of how your loans are accruing interest.


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