Using Loan Discount
As we cover in some of our other articles, discount (also known as a lender's fee) is the difference between the face value of a loan and the cost of acquiring the loan. Discount may be a part of your lending business, and you may be wondering how you can use discount in LoanPro. If this is the case for you, this article is the place to be. Here, we'll describe discount's role in lending, how to apply discount to loans, view a loan's discount information in the payment breakdown, and how to create tenant-level discount reports.
If you're interested in learning how discount is calculated, however, we have a separate Discount Calculations article that breaks down LoanPro's available calculation options.
Accounting for Discount
Let's start by explaining discount's place in lending. Discount can be used in your lending model in a number of ways, but its most common use applies to lenders purchasing automobile loans at a price lower than the dealership's determined loan amount. For example, say a dealership sells a car to a borrower for a total of $10,000. But then the dealership decides to sell the loan to a separate automotive loan company. The loan company will likely want to sweeten the deal somehow—perhaps by a discounted price. Since the loan company is taking on a bit of risk by buying the loan, they'll buy it for $9,000 while still maintaining the borrower's original loan terms of a $10,000 loan.
How does this factor into the way the loan is calculated? The loan itself isn't affected. The originally decided terms for the loan remain the same, and the borrower is paying the same amount as agreed upon. Discount is purely profit for the lending company, and when it's used, it's simply a way to allocate a portion of a borrower's payment as that profit. We cover this concept in detail in our Discount Calculations article, but as a short summary, the discount calculation type affects how a payment's principal, interest, fees, and discount is allocated without changing the total payment amount.
If you set a discount amount on a loan, how it's applied to your loans' payments is up to you and your lending strategy. Some lenders prefer a steady stream of revenue from discount and others like to collect discount as quickly as possible. Since discount is purely profit for a lending company, there are also tax and accounting implications that need to be considered. We recommend consulting your accounting team to determine which discount practices fit your tax strategy best.
Applying Discount to a Loan
Applying discount information to a loan happens at the loan setup phase. To demonstrate how to apply discount, let's create a new loan. (We won't cover the all the steps for creating a new loan here, but you can read the linked article for a refresher.) Once your loan is created, you will have the opportunity to enter the loan's setup terms. As we show below, you can determine the loan's discount settings within the setup terms.
Here, you can enter the discount amount for the loan. If you'd prefer, you can instead set your discount amount as a percentage of the total loan amount by clicking the 'Show %' button. We'll set our discount at $1,000 to keep things simple. Next, head to the 'Advanced Configuration' tab to set the discount calculation type.
LoanPro offers a few different discount calculation types, and they each calculate discount in a different way. Select the one that fits your lending and discount strategy the best. We'll select 'Rebalancing' since it's the most popular option.
We've skipped over a wealth of other setup terms, so feel free to experiment with other settings. Once you're satisfied with your loan's terms, click 'Save & Calculate' to save the settings you've selected. Then, scroll down to the 'Schedule Tools' button and select 'Schedule Roll' to preview how your discount is applied to the payments of the loan.
Since we used the Rebalancing calculation type, you'll see that our example calculates the discount amount as $16.67 on each payment. The math for this value is simple: it's the discount amount divided by the term of the loan or $1,000 / 60 = $16.67. Assuming the lender makes each of their payments on time, the discount amount will remain the same throughout the loan's life.
Loan Transactions Tab
Say you already have an activated loan and you'd like to view its discount breakdown. To view this information, head to a loan account and navigate to Reports > Transactions. You'll notice that this page looks similar to the Schedule Roll listed above.
Here, you can view how discount has been applied to the payments on the loan. In addition, the side panel on the right displays a breakdown of each portion of the loan. Since three payments have been made on this loan, a total of $50.01 in discount has been paid.
Discount in Reports
We've seen how discount can be viewed at the loan level. Now, let's look at viewing discount at the tenant-level. If you would like to see a breakdown of how discount has been applied to all loans within your account, navigate to Reports > Transactions History > and select the Payment Breakdown tab.
If you're new to the Reports section of your account, it is here that you can view and generate reports for information across your entire account.
The Payment Breakdown section (highlighted in the top left corner) of the Reports tab provides a breakdown of payments that have been made on loan accounts within your company over a date range; and on this tab, you can view how discount has been applied to payments you have received.
We've highlighted a few sections of this report to show you the important parts. First, you can see that we've used the 'Log Date Period' filter on the left to view payments made between March and April. Under the 'Payment Application' section, you can see how the payments are broken down into principal, interest, fees, discount, and other. Next to the payment application is a pie chart that visualizes how these categories make up the whole.
Listed down below is a list view of each payment received. This section displays the accounts that received payments (and if you look closely, you can even see the discount applied to the account we used earlier in this article). When you use the Payment Breakdown report, you may notice that your account shows different columns than our example. To display or hide columns, click the highlighted button with the three stacked columns on the left side of the list view.