Line of credit overview
The basics on line of credit programs, accounts, and calculations.
Within LMS, line of credit accounts are distinct from loans – it's not just a different type of loan or a special setting you apply, but a whole separate entity, with values saved to different database tables and calculations that run differently. They do, however, work similarly to loans in some ways: You can set up tenant-wide defaults, create accounts, and service those accounts with a wide array of built-in tools.
How line of credit accounts work
Here's the basic process:
- Set up a Program. A program is a template for line of credit accounts. You'll set them up at the tenant level, and then use them to create individual accounts. Our article on line of credit programs walks you through the details and available options.
- Create an Account. From the line of credit manager, there's a single button click to create a new line of credit account. The system walks you through choosing a program, entering account details, and linking customers. That process is explained in creating a line of credit account. You can either leave all the settings you have saved in the program, or edit them for this specific account.
- Issue a card (optional). LoanPro supports card-based and cardless line of credit programs. If you want borrowers to access credit through a card, you can use one of our integrated card issuers. Then, create a card linked to the specific line of credit account.
- Service the Account. Most of the servicing options available for installment loans will also be available on line of credit accounts.
Calculations on line of credit accounts
The key to line of credit calculations is the billing cycle.
Because a line of credit extends out indefinitely, it can't be calculated from the outset in the same way that you would amortize an installment loan. LMS gets around this is using a “contextual” calculator, calculating each billing cycle based off the context of the previous one. This means the calculator can quickly get you accurate numbers, but it also locks in previous billing cycles. Transactions made before the current cycle can't be directly reversed, and instead have to be offset with a different transaction (like using a credit to offset a charge or swipe).
In the United States, the major federal law governing credit cards is the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which we summarize in our article CARD Act Explanation of Compliance.
What the Calculator Needs to Know
For the current billing cycle, the calculator needs to know the following:
- General setup (like statement dates and minimum payment configuration)
- When the last period ended and this one began
- The last period's due date
- The balance and credit limit for each bucket at the end of the last period
- Abated swipes
- Outstanding fees
- Transactions applied in the current period
Bear in mind that you don't need to manually enter this information—it's all saved in the account, and LMS can make all it's calculations. And when the current cycle ends, it can do it all again, calculating for the next period based on the values at the end of this current one. The end of one period marks the start of the next, and the cycle repeats indefinitely.
Beyond the basics of the billing cycle, LMS also calculates several other figures on line of credit accounts. These sections each dive a little deeper into how these accounts work. If you're not yet familiar, you'll want to read about their Setup, particularly Buckets.
Interest Accrual
Unlike an installment loan, where you have a single interest rate for the entire account, line of credit accounts let you have separate rates for each of your buckets. If you want to encourage borrowers to spend in one category and discourage them from spending in another, you can have those swipes route to different buckets with different interest rates.
Bucket Settings Related to Interest
Each bucket has the following settings related to interest accrual:
| Field | Description |
| Interest Charge Method |
This is the method used to determine the finance charge on the line of credit. Though we plan to add more options in the future, there is currently only one:
|
| Computation Method |
This is applicable when the Interest Charge Method of Interest is chosen for the bucket. The options for interest computation are as follows:
|
| New Transactions |
This determines when interest will accrue on new transactions. The options are as follows:
|
| Original Interest Rate |
This is only applicable if Interest is selected as the Interest Charge Method. The interest rate used to calculate interest on the balance in the bucket. |
| Days in Year | Just like the days in year on an installment loan, this lets you either calculate the actual number of days or a number based on the account's billing cycle. (The interest rate remains the same with either option; this just determines whether it's divided out into 365 portions, or a different number that divides evenly across your billing cycles.) |
| Minimum Interest | If this account would accrue interest in a billing cycle, it will accrue at least this amount. If your minimum is set to $1 and the account would accrue only $0.85, it will accrue a whole dollar instead. |
| Compound Past Interest Charges? | If this box is checked, then the interest accrued in previous billing cycles will begin accruing interest itself. |
| Interest Abatement Method |
This setting will determine how interest abatement will work for the bucket.
|
| Interest Abatement Days | The number of days that the abatement period lasts. |
Note that this is an abbreviated list showing only the settings related to interest.
The interest rate for each bucket is more or less independent from other buckets in the account, but they do all come together when it comes to calculating a minimum payment and “blowing the election” (see the next tab).
Election
In a line of credit, election refers to a set of rules that determines whether a bucket should accrue interest to a bucket in each period. When the calculator decides to apply interest and flips this switch, we call it “blowing the election”.
At the beginning of each period, the system calculates a “starting interest bearing balance” for each bucket. This is the amount the borrower will have to pay by their due date to keep the bucket from accruing interest.
What determines Interest Bearing Balance?
A bucket's interest bearing balance is calculated each billing cycle. We start with the bucket's total balance, and then subtract a few items:
- Abated swipes
- Interest-free charges
- Interest from previous billing cycles. (Note that if Compound Interest is turned on, this previous interest will actually be included.)
This leaves us with all of the past swipes and fees that do accrue interest.
If the due date comes and the borrower has paid less than the interest bearing balance, the election is blown, and the system starts accruing interest on that bucket. But it's not just from the due date forward—interest will start accruing from the beginning of the period, using the bucket's interest rate and other settings to calculate how much is now due.
If they want to get back to that interest-free state that they were in before they blew the election, they'll have to completely pay off the bucket's interest bearing balance.
Payment Waterfall Application
When you log a payment, you need to decide which parts of the account the money goes to first—either buckets or specific components, like interest and fees. We call this order a payment waterfall application. Much like with installment loans, the waterfall application is saved as a payment type, making it easy to select a type when you log a payment.
We explore the options and compliance concerns for setting up payment types in our article payment waterfall application.
Payment Splitting
If a line of credit is linked to other lines or installment loans, you can split a single payment between multiple accounts. There are several different ways of splitting the money, and these are all covered in our article payment waterfall application.
This is especially useful if you've used a balance rollover to convert part of a line of credit's balance into an installment loan.
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