Close a Loan
Most of the process in closing a loan will consist of policies and procedures that your company has put in place. The purpose of this article is to go over the basic processes and possibilities when closing a loan.
Note: This article does not cover paying off a loan. For that, see Pay Off a Loan.
On occasion, you may have loans that are no longer performing, and you may want to move them off your books. Typically, these loans are charged off (although you can also credit the loan balance to close-out the account—however, this is not typical).
To charge off a loan, you’ll start by logging a payment for the amount you are charging off. If you are completely closing a loan, you will usually log a payoff payment.
Once the payment is logged, navigate to Servicing > Net Charge-Off inside the loan.
Click the Adjustments tab. Here you will see a list of payments made on the loan.
Find the payment you want to mark as a charge-off. Click the toggle switch to the right of the payment listing. This will set the payment as a charge-off payment.
You will be able to log recovery payments against the charged-off amount in case you unexpectedly collect on this account in the future.
In accounting terms, a charge-off is a loss on a loan note asset. For tax purposes, capital losses can offset capital gains and can even offset some ordinary expenses, but the offset is usually limited to a certain amount. To account for a charge-off on your books, credit the loan note asset for the amount that will be charged off. Debit losses for the same amount. If you unexpectedly collect on this account in the future, it will be necessary to log adjusting entries for these accounts.
When you close a loan, usually you will change the status of the loan. This can be done by navigating to Loan Settings > Settings inside the loan account. Click Edit. Choose the new account status and/or sub-status from the Loan Status and Sub-Status drop-downs respectively. These lists can be customized by navigating to Settings > Loan > Labeling > Loan Status.
If you give collateralized loans, it’s possible that you are closing the loan after a repossession has occurred. If that is the case, you may want to enter the date you sold the repossessed collateral into the Liquidation date field. Otherwise, enter the date the loan will be closed (probably today’s date) into the Closed Date field. Click Save to save the settings changes.
After a loan is closed, usually the loan will still be reported to credit for some amount of time. This will ensure that the credit bureaus get notified that the loan has been paid off or charged off so that the borrower’s credit data is accurate. There is no standard for the amount of time to continue to report a closed loan. We recommend you continue to report it for 90 days. If you are using LoanPro’s credit reporting, the best way to ensure that this happens is to modify your export rules in the Credit Reporting tool.
To change the export rules for credit reporting, select Credit Report from the Data Options on the Loan Manager page.
Click to expand the export rules section.
Enter the number of days you want to continue to report closed loans into the Cutoff Days field. (We recommend continuing to report closed loans for 90 days.) This should take care of credit reporting for closed loans.
If a loan has a $0.00 balance, interest will no longer accrue, late fees will no longer be assessed, and AutoPays will no longer run. If your closed loan does not have a $0.00 balance, interest will continue to accrue. If processing an AutoPay will take the loan balance negative, AutoPays won’t process. If you don’t want to pay off or charge off the loan, but you want to close it, you can stop interest accrual, late fees, and AutoPays manually.