Extra Towards Options

Introduction

Sometimes, borrowers might pay more than their payment amount. For example, if a borrower's payment comes due for the amount of $300.00 and the borrower makes a payment of $350.00, they paid $50.00 more than what is due. This "extra" $50.00 can be applied in different ways. When logging a payment in LoanPro you can choose how the "extra" payment amount will apply. This article will explain those options. If you're new to payments, read Payments 101 first.

Extra towards options will be different depending on if your interest is set to accrue between periods or between transactions. These options will be explained below.

Between Periods

If you set the interest to accrue between periods, the Extra Towards options are “principal only” and “next payment”.

  • Principal only will apply the extra amount directly to principal. This will not affect the past-due calculation or the next payment amount on the loan. For example, if the “extra” amount is $10 and the next scheduled payment is $200, the next scheduled payment will still be $200.
  • Next payment will apply the “extra” amount to the next payment. The application date of the “extra” amount will be the same as the next scheduled payment date. For example, if the “extra” amount is $10 and the next payment comes due on July 1, $10 will apply to the loan on July 1.

Between Transactions

If interest is accruing between transactions, the Extra Towards options include "principal," "principal only," and several variations on "classic".

  • Principal will apply the extra amount towards the principal balance on the loan. For example, if $80.00 is due on the loan and the borrower pays $200.00, selecting extra towards 'principal' will mean that after the payment applies, -$120.00 will show due on the loan, reducing the future amounts due by $120.00. Using this option allows the borrower to pay ahead on the loan, meaning the following payments on the loan will be reduced by the extra principal paid. Future payments will not show as due until the due amount exceeds the extra principal amount paid. So in our example, the extra $120 will cover the next $80 amount due and $40 of the amount due after that. If the customer was on a monthly payment frequency, they would not show due for another payment for 2 months and then only $40 would be due.
  • Principal only will also apply the extra amount towards the principal balance on the loan, lowering the principal balance by the extra amount. However, this will not affect/pay down the next payment unless the next payment is the final payment.  For example, if $80.00 is due on the loan and the borrower pays $200.00, selecting extra towards principal only will mean that $80.00 will cover the amount due bringing the account current and $120.00 will be posted as a principal only payment and the next scheduled payment will still be due for the full amount.
  • Classic will apply the extra amount according to the following sequence; first, to any amount due on the account; second, to the next scheduled due payment that has not been covered; and finally, any remaining amount will be applied as a principal only payment (doesn't affect the amount of future payments until the end of the loan). For example, if $80.00 is due on the loan and the borrower pays $200.00, selecting extra towards 'classic' will mean that $80.00 will cover the amount due bringing the account current, $80 would cover the next scheduled payment and $40.00 would be posted as a principal only payment. The result would be that the customer would not show due for their next payment, but would be required to pay the full amount of the payment after that.
One thing to be aware of regarding the Classic option is that after covering what is due, it will apply remaining funds to the next unpaid scheduled payment, even if that payment is months away.
  • Classic v1 works similar to Classic, with the payment applying to the current amount due, then covering the next scheduled payment, and then applying to principal only. For instance, if the payment amount is $80 and $80 is due, but the borrower pays $300, then $80 will go to the due payment, $80 will go to the next scheduled payment, and $140 will go towards principal. The main difference between Classic and Classic V1 is that Classic V1 does not cover any scheduled payments beyond the next scheduled payment. If the customer makes a payment larger than what is due and the next scheduled payments is already covered, the payment becomes a principal-only payment. This limits the ability of a customer to only pay one payments ahead in all circumstances.
  • Classic v2 works like Classic V1, with the payment applying to the current amount due, then covering the next two scheduled payments and then principal only. For instance, if $80 is due but the borrower pays $300, then $240 will go to the due payment and the next two ($80 x 3), and $60 will go towards principal. Like Classic V1, Classic V2 does not cover scheduled payments beyond the next two scheduled. If the customer makes a payment larger than what is due and the next two scheduled payments are already covered, the extra towards all becomes a principal only payment. This limits the ability of a customer to only pay two payments ahead in all circumstances.


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