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LoanPro originally built its Loan Management System (LMS) to solve two problems. First, to make sure the calculations are accurate and second, to bring transparency to system data. You may wonder why calculation accuracy is even a problem. Isn't there only one way to calculate a loan? Can lending systems exist if their calculations aren't accurate? Here's a illustration of a common problem with many lending systems.
Any US lender that gives loans to consumers is required to disclose certain numbers under the Truth In Lending Act (TILA). These include things like the total loan amount, the finance charge, the number of payments, etc. It is extremely common for lending system to use the simplest calculation of these loan numbers in order to create a contract.
These simple calculations work on paper, but they don't work as well when trying to calculate daily interest accrual when payments and accrued interest can't be calculated as fractions of a penny. They also don't work if you have long or short payment periods. Shouldn't more interest accrue in January when there are 31 days than in February when there are 28?
LoanPro's calculations are flexible and accurate to address exactly this kind of question. The result is that the information on your loan contract and what you do when really servicing a loan can match perfectly.
Think of loan calculations as any of the choices that factor into how you calculate when payments come due, what portion of each payment will be interest, how interest will be calculated, etc. LoanPro and our LMS provide lots of options for loan calculations to make sure we can accommodate a wide range of lending scenarios. These options accommodate for things like:
- Irregular (long or short) first payment periods.
- Whether payment periods should be uniform (think 30-day months) or use the actual number of days, which results in a different number of days in a year.
- Whether to accrue interest on the first day of the loan.
- In what order payments should apply to interest, principal, fees, and escrow.
- Whether payment amounts should be uniform.
- Interest rates that are different for different payment periods.
- And many more.
Where Do Loan Calculations Fit?
Many lenders make the mistake of undervaluing the way loans are calculated. The methods of acquiring customers and the underwriting process they go through are weighted heavily in the eyes of most lenders. However, the ability to calculate loans in a way that meets all legal requirements but maximizes revenue is important.
More importantly still, the model you use for lending should be something your lending software can accommodate. Not all loan software is created equal. LoanPro was designed to be configuration-first, which means it can pivot with you when your company changes or adds loan products.
We also understand that more options is not always better. That's why we provide default configurations for most lending types. We also have a great customer success team that will help you get your calculation settings and defaults right.
This Feature is Not
- LoanPro calculations will not always match the TILA numbers from a legacy software: LoanPro's calculations are very accurate and precise, but plugging in numbers from your old system may create small numerical changes which can create a legal issue. However, LoanPro offers advanced configuration settings that help with Contract Matching and a Round Payment Schedule tool that will match the payment schedule accordingly and avoid legal conflict.
If you'd like to learn more about what LoanPro does specifically to calculate and configure loans take a look at the Calculations Category of our documentation.