Payment waterfall application – line of credit
Determine how payments apply to different components of lines of credit.
LoanPro's payment types feature allows you to choose a payment application waterfall, or the order in which the money from a payment applies to the different parts of a loan such as interest, principal, and fees. Some payment types—like principal only—will direct all funds into one or two areas; others will direct funds to all parts of a loan but in different orders. This article will explain how to set up payment types and configure the payment application for lines of credit. To learn more about selecting payments types when logging and processing payments, visit our logging payments article. And if you're using installment loans, check out Payment waterfall application – installment loans.
Line of credit components
Just like an installment loan, a line of credit account is made up of different parts including the principal balance they've borrowed, interest, and charges. On top of that, the account is divided into buckets and the CARD Act places requirements to the order of payments. There are two major considerations when configuring payment waterfall settings:
-
Should the waterfall prioritize entire buckets, or components within the buckets?
When prioritizing buckets, the payment applies toward a single bucket until it's completely paid off, and then moves on to the next. Prioritizing components, the payment applies to one part of the balance (such as interest) and pays off that component in each bucket before moving on to the next component (like principal or fees.) This will make a larger difference if some components accrue interest and others don't. -
Should the waterfall change when the borrower only pays the minimum payment?
The CARD Act requires that when borrowers pay more than the minimum payment, that excess amount must go towards whatever balance has the highest interest rate. But if they only make the minimum payment (or even less than that), you're free to apply the payment to the loan in any order you see fit. For example, if the minimum payment is $50 and the borrower pays $75, then $50 can apply however you'd like, but $25 must go to the buckets with the highest interest rate.
Configure payment types
To set up a line of credit payment type, you'll go to Settings > Line of Credit > Payments. There, you'll see a list of your current payment types. On the right, there are buttons to delete or edit them, as well as a switch that can toggle them active and inactive. At the top right of the page, you can click ‘Add’ to create a new payment type.
Near the top of the page are two settings:
- Name: This text field lets you name the payment type. We recommend a descriptive and distinct title, so agents won't have any trouble identifying it when they log a payment.
- Status: This toggle switch determines whether the payment type is available to be used when logging payments.
Below, the rest of the page is divided into two sections— ‘Minimum Payment’ and ‘Excess’. The settings in both sections are identical.
At the top right, you'll see a checkbox asking if you want to ‘Prioritize Components over Buckets’. This determines whether you'll pay off entire buckets first, or entire components (like interest or fees). If left unchecked, the system will pay off entire buckets one at a time. Within each bucket, it'll pay off the components in the order you specify.
Within each category, you can drag and drop the buckets or components to decide the specific order. The available categories are:
- Abated swipes
- Interest bearing past fees
- Interest bearing fees
- Interest charges
- Starting interest charges
- Interest free fees
- Interest fee past fees
- Swipes
- Other interest bearing
You can also use the ‘Most Expensive First’ switch and the system will rearrange them to pay off the part with the highest interest rate first. If any buckets have the same interest rate, then the system will compare these values in each bucket (in this order) to determine which is the most expensive:
- Previous balance
- Daily balance
- Average daily balance
- Adjusted balance
Once you've set your waterfalls for ‘Minimum Payment’ and ‘Excess’, click ‘Save’ in the top right of the page.
Linked account payment application
Some lenders may issue multiple lines of credit and/or loans with a single borrower. Depending on their product model, they may split off single swipe transactions or periodically roll bucket balances into individual installment loans. LoanPro's line of credit lets you link multiple child accounts to a single line of credit. This means that one line of credit can act as the main or parent account for multiple loans or lines of credit, or a combination of the two. When accounts are linked, you have the option to split payments between different accounts.
To link an account,
- Navigate to Lines of Credit > choose an individual account > Account Settings > Account Linking.
- Here you can link to both loans and line of credit accounts. Click ‘Link Account’ in the ‘Lines of Credit’ tab to find and select a line of credit account you want to link to.
Note you can only link to accounts that are not already linked to a different account.
To split a payment,
- Click ‘Log’ in the upper right corner, then ‘Payment’ from the dropdown menu. The following window will appear.
- Check the ‘Split Payment’ box to access split payment type options. You must create payment split types if you would like to use this function. To do so, reach out to your LoanPro representative. Payment split type options must be added through the API.
The options available to you if you choose to add payment split type options are chronological or due amounts.
Chronological
Chronological payment splitting is when the loan or line of credit that has existed the longest will be paid off first. Once the oldest account is paid off, the next oldest account will be paid off, and so on until all linked accounts are paid off completely.
Here are a few things to note when using chronological payment splitting:
- If there are any linked accounts with a contract date (loan) or an open date (line of credit) that are after the apply date for the payment, the payment will not apply to them.
- If a payment exceeds the amount needed to pay off all child accounts, the excess amount will be applied to the parent line of credit. This will still be true, even if nothing is due on the parent line of credit, which means the balance can be taken negative.
- When a payment applies, the IDs of the payments created on child accounts will be the same as the one on the parent line of credit account.
- If two linked accounts have the same contract date or open date, payments will apply to the account with the ID that is numerically lower first. (The lower ID indicates which account was created first.)
Chronological payment splitting example
For example, imagine you have a parent line of credit with three linked child accounts: two installment loans and a line of credit as follows:
Loan 1:
Contract Date: 01/01/2022 Payoff Amount: $1,000
Loan 2:
Contract Date: 03/01/2022 Payoff Amount: $2,000
Line Of Credit (Child):
Open Date: 02/01/2022
Total Balance: $750
If a payment of $2,200 is applied to the parent line of credit, and the parent line of credit is not included in the split, the payment will apply as follows:
Since the contract date for Loan 1 is the furthest in the past (01/01/2022), the payment will apply to it first. Since the payoff amount is $1,000, $1,000 of our $2,200 payment will apply to Loan 1, paying it off completely.
Since the open date of the Line of Credit (Child) is the next furthest in the past (02/01/2022), the remaining $1,200 will apply to the Line of Credit (Child). The total balance of the Line of Credit is $750, so $750 will apply to the Line of Credit (Child), paying it off (note that even though the Line of Credit (Child) is paid off, it will remain open).
Now, because the contract date for Loan 2 is the most recent (03/01/2022), the remaining $450 will apply to Loan 2. Note that the payoff balance for Loan 2 is $2,000, so the $450 from the payment does not pay it off.
In total, 3 payments will be made in this scenario:
$1,000 to Loan 1
$750 to t (Child)
$450 to Loan 2
Note that for this example, nothing will apply to the parent line of credit. An option is available to include the parent line of credit in the payment split, but this example assumes that option has not been chosen.
Due amounts
Due amounts will determine the order of split payments by looking at the past or future payments of the linked accounts. There are two different options you can choose: past due and extra (future).
| Type | Description | Options |
|---|---|---|
| Past due | Money from a payment will apply to the amount past due on each child loan or line of credit account. You can choose one of two options for a split payment application. |
Chronological: For lines of credit and loans linked to the parent, money will be applied to all past due payments in chronological order of when they came due, oldest to newest. If two payments came due on the same day, the payment would apply to the loan or line of credit with the earlier contract or open date.
Pro rata - Due amounts: This application will look at each past due payment the same way that LoanPro looks at payments in delinquency categories. Each missed payment will be numbered, and payments with the same number will be gathered together in groups. The most recent payment for each account will get the number 1, the next number 2, and so on. Money will apply to each group beginning with the group with the earliest past due date until it can no longer pay for the entirety of a group. Then, when the amount of money is less than the total of the payments in that group, it will be allocated in proportion to the bucket amount of the group. |
| Extra | Extra refers to applying payments to amounts that have not yet come due on linked child loans. |
Chronological: It will apply payments to future loan payments in the order in which they will come due.
|
Past due
With the Past Due option, money from a payment will apply to the amount past due on each child loan or line of credit account. There are four options for split payment application when Due Amounts and Past Due are chosen. These are:
- Chronological
- Pro Rata - Due Amounts
- Pro Rata - Principal Balance
Chronological
Chronological payment application for due amounts works in an intuitive way. For lines of credit and loans linked to the parent, money will be applied to all past due payments in chronological order of when they came due, oldest to newest.
Due amounts - chronological payment splitting example
In this example, let's look again at a parent line of credit with three linked child accounts: two installment loans and a line of credit. For each account, we'll show the past-due payments, including their payment dates:
Loan 1:
Payment 1: $250, Due 01/15/2022
Payment 2: $250, Due 02/15/2022
Loan 2:
Payment 1: $125, Due 02/01/2022
Payment 2: $125, Due 03/01/2022
Line Of Credit (Child):
Payment: $75, Due 02/06/2022
A split payment made on the parent line of credit would apply to past-due payments in chronological order:
Loan 1 - Payment 1: $250, Due 01/15/2022
Loan 2 - Payment 1: $125, Due 02/01/2022
Line of Credit (Child) - Payment: $75, Due 02/06/2022
Loan 1 - Payment 2: $250, Due 02/15/2022
Loan 2 - Payment 2: $125, Due 03/01/2022
If a payment for $500 is received on the parent line of credit, it would apply as follows:
$250 to Loan 1
$125 to Loan 2
$75 to dit (Child)
$50 to Loan 1
Note that only a single payment would be made for Loan 1, even though the payment will apply to two past-due payments. It's also important to note that there is only one past-due amount for the Line of Credit (Child), since no forecast payments exist on a line of credit.
If two payments came due on the same day, the payment would apply to the loan or line of credit with the earlier contract or open date. In the event that the dates are the same, payments will first apply for the account with the lowest numeric ID. (The lower ID indicates which account was created first.)
Pro rata - due amounts
The Pro Rata - Due Amounts application will look at each past due payment the same way that LoanPro looks at payments in delinquency categories. Each missed payment will be numbered, and payments with the same number will be gathered together in groups. The most recent payment for each account will get the number 1, the next number 2, and so on.
Money will apply to each group beginning with the group with the most earliest past due date until it can no longer pay for the entirety of a group. Then, when the amount of money is less than the total of the payments in that group, it will be allocated in proportion to the bucket amount of group.
If you are unclear on how payments are numbered for payment application, take a look at the numbering example in the fold below.
Payment numbering example
In this example, let's look again at a parent line of credit with three linked child accounts: two installment loans and a line of credit. For each account, we'll show the past-due payments, including their payment dates:
Loan 1:
Payment 1: $250, Due 01/15/2022
Payment 2: $250, Due 02/15/2022
Payment 3: $250, Due 03/15/2022
Loan 2:
Payment 1: $125, Due 02/01/2022
Payment 2: $125, Due 03/01/2022
Line Of Credit (Child):
Payment: $75, Due 02/06/2022
In this example, the account with the most past-due payments is Loan 1. Since it has 3 past-due payments, it will have three groups. The groups will be numbered in reverse chronological order. So, the groups for Loan 1 will look like this:
Group 1 - Payment 3: $250, Due 03/15/2022
Group 2 - Payment 2: $250, Due 02/15/2022
Group 3 - Payment 1: $250, Due 01/15/2022
Now we can add payments from Loan 2 and the line of credit (child) into the existing groups. Because Loan 2 only has 2 past-due payments, the most recent payment will be in group 1 and the second most recent will be in group 2. Since lines of credit only have one past-due amount, that amount will go to group 1. The groups will look like this:
| Delinquency Group | Loan 1 | Loan 2 | Line of Credit Child |
| Group 1 | Payment 3: $250, Due 03/15/2022 | Payment 2: $125, Due 03/01/2015 | Payment: $75, Due 02/06/2022 |
| Group 2 | Payment 2: $250, Due 02/15/2022 | Payment 1: $125, Due 02/01/2022 | |
| Group 3 | Payment 1: $250, Due 01/15/2022 |
Notice that the specific due dates of the payments don't matter, it only matters which number of past due payments each represents for the account.
Then, expand the fold below to see how split payments would be divided between the different accounts.
Pro rata - due amounts payment splitting example
| Delinquency Group | Loan 1 | Loan 2 | Line of Credit Child |
| Group 1 | Payment 3: $250, Due 03/15/2022 | Payment 2: $125, Due 03/01/2015 | Payment: $75, Due 02/06/2022 |
| Group 2 | Payment 2: $250, Due 02/15/2022 | Payment 1: $125, Due 02/01/2022 | |
| Group 3 | Payment 1: $250, Due 01/15/2022 |
If an $800 payment is applied to the parent line of credit using Pro Rata - Due Amounts payment split application, the payment will apply as follows:
In Delinquency Group 3:
$250 to Loan 1 - Payment 1
This leaves $550 to apply in delinquency group 2
In Delinquency Group 2:
$250 to Loan 1 - Payment 2
$125 to Loan 2 - Payment 1
This leaves $175 to apply to delinquency group 1
In order to determine how much of the remaining $175 should be allocated to the payments in delinquency group 1, we will first find the percentage of the payment for each account in delinquency group 1 to the total of all the payments in delinquency group 1.
For Loan 1 this will be 250/(250 + 125 + 75) or 250/450 or 55%
For Loan 2 this will be 125/(250 + 125 + 75) or 125/450 or 28%
For it (Child) this will be 75/(250 + 125 + 75) or 75/450 or 17%
Now, we multiply the respective percentages by the remaining $175 to see how much will be allocated to each account.
For Loan 1 this will be about 55% x $175 or $96.25
For Loan 2 this will be about 28% x $175 or $49.00
For dit (Child) this will be about 17% x $175 or $29.75
This gives the following totals allocated to each account:
Loan 1 - $596.25
Loan 2 - $174.00
Line of Credit (Child) - $29.75
Extra
Extra refers to applying payments to amounts that have not yet come due on linked child loans. There are five options for split payment application when Due Amounts and Past Due are chosen:
- Chronological - Due Date
- Chronological - Age
- Pro Rata - Principal Balance
Note that Extra application is only relevant to loans, because line of credit don't have forecast due amounts.
Chronological - due date
Chronological - Due Date applies payments to linked loans in an intuitive way. It will apply payments to future loan payments in the order in which they will come due.
Chronological - due date payment splitting example
In this example, let's look at a parent line of credit with two linked installment loans. For each loan, we'll show the future payments, including their payment dates:
Loan 1:
Payment 1: $250, Due 10/15/2022
Payment 2: $250, Due 11/15/2022
Loan 2:
Payment 1: $125, Due 11/01/2022
Payment 2: $125, Due 12/01/2022
In this circumstance, a split payment made on the parent line of credit would apply to future payments in chronological order. That is:
Loan 1 - Payment 1: $250, Due 10/15/2022
Loan 2 - Payment 1: $125, Due 11/01/2022
Loan 1 - Payment 2: $250, Due 11/15/2022
Loan 2 - Payment 2: $125, Due 12/01/2022
If a payment for $500 is received on the parent line of credit, it would apply as follows:
$250 to Loan 1 - Payment 1
$125 to Loan 2 - Payment 1
$125 to Loan 1 - Payment 2
Note that only a single payment would be made for Loan 1, even though the payment will apply to two future payments.
If two payments came due on the same day, the payment will apply to the loan with the earlier contract or open date. In the event that the contract dates are the same, payments will first apply for the account with the lowest numeric ID. (The lower ID indicates which account was created first.)
Pro rata - principal balance
Pro Rata - Principal Balance works similarly to Pro Rata - Due Amounts. Future payments are still numbered and grouped, and funds are applied to a group's lowest numbered payment first. The difference is that the percentage of available funds that gets allocated to each future payment is calculated using the principal balances of the related loans, not the amount of the future payments.
For example, imagine you have one group containing three future payments. The corresponding loans for each payment have principal balances of $5,000, $2,000, and $10,000, respectively. The amount of available funds allocated to each payment will be based on a percentage of the total principal balances in the group. So, the amount of money that will apply to payment 1, which corresponds to the loan with the $5,000 principal balance, will be calculated as follows: $5,000/($5,000 + $2,000 + $10,000) or $5,000/$17,000 = 29.4%.
Pro rata - principal balance payment splitting example
In this example, let's look at a parent line of credit with two linked installment loans. For each loan, we'll show the future payments, including their payment dates and principal balance amounts:
Loan 1:
Payment 1: $250, Due 10/15/2022
Payment 2: $250, Due 11/15/2022cipal Balance: $1000
Loan 2:
Payment 1: $125, Due 11/01/2022
Payment 2: $125, Due 12/01/2022Principal Balance: $2000
When we number the payments, this results in two groups:
Group 1, which will include
Loan 1 - Payment 1
Loan 2 - Payment 1
And Group 2, which will include
Loan 1 - Payment 2
Loan 2 - Payment 2
Funds will first apply to Group 1. If the funds can cover all the payments in the group, then the payments will be paid off. If funds are insufficient to cover all payments, a calculation will be done to determine how to allocate the remaining funds.
For example, if we apply a payment of $500, it would be allocated as follows:
First it would apply to all payments in Group 1. This is because the total of payments for group 1 is $375, which is less than the $500 available.
$250 to Loan 1 - Payment 1
$125 to Loan 2 - Payment 1
Now, the remaining $125 ($500 - $250 - $125) will be applied to the payments in Group 2. To determine how much should apply to each payment, we will do the following.
First we will calculate what percentage each loan's principal balance is of the total of principal balances for all linked loans for the group. This gives:
Loan 1 1,000/(1,000 + 2,000) or 1,000/3,000 or 33%
Loan 2 - 2,000/(1,000 + 2,000) or 2,000/3,000 or 67%
So, to determine the payment allocation, simply multiply the percentage by the available funds. This means:
33% x $125 or $41.25 will apply to Loan 1 - Payment 2
67% x $125 or $83.75 will apply to Loan 2 - Payment 2
This means that of the $500 paid, $291.25 will apply to Loan 1, while $208.75 will apply to Loan 2.
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