How To Use Revolving Compound Interest

Compound Interest

If the interest due is added to the principal at the end of each interest period and thereafter earns interest, the interest is said it be compounded.

The sum of the original principal and total interest is called the compound amount or accumulated value.

The difference between the accumulated value and the original principal is called the compound interest.

The interest period, the time between two successive interest computations is also called the conversion period.

Revolving Compound Interest

Revolving Compound Interest is demonstrated in the use of an ordinary credit card. Interest is calculated on the outstanding balance and is added to it resulting in a new balance. This new balance becomes the Principal amount for the next period's interest calculation.

Original Principal

*** VERY IMPORTANT ***

When you use Compound Interest, you MUST post the Original Principal amount as a Transaction (Type 196). Any Principal amount entered into Original Principal directly is overwritten as Collect! uses the total of all Principal transactions to arrive at the Original Principal.

Frequency Of Conversion

In Collect! you can choose to convert Interest into Principal using one of the following conversion periods.

Daily
Weekly
Bi-weekly 30 Days
Monthly
Semi-monthly
Bi-monthly
Quarterly
Semi-annually
Annually
Custom

Interest Rate And Time

Annual interest rate is entered in the Interest Detail form and a time is chosen, 360, 364 or 365 days.

Posting Payments

*** VERY IMPORTANT ***

When posting payments, transaction types MUST have the Payment Breakdown option set so that Collect! can breakdown the payment and disburse it correctly to fees, interest, and principal according to your transaction type settings.

By default, Collect! applies payments to Fees, then Interest, then Principal. This order can be customized when you create your Payment Breakdown transaction types. Please be sure you know what you are doing if you deviate from the default order, i.e. Fees, then Interest, then Principal.

Calculating Accrued Compound Interest

Accrued Interest =

(Owing x ((1 + Rate) ^ (Periods))) - Owing

The original Owing is subtracted from the accumulated value to determine the compound interest.

Where:

Owing = Principal + Original Interest.

Rate = Periodic Interest Rate as a decimal percentage (e. g., .045)

Periods = Count of elapsed conversion periods.

^ = 'To the power of', i.e. the exponent.

This is calculated for all periods, starting from the interest calculation date and ending with the current date. For periods where there are payments, the interest is calculated on the average account balance over the 30 day period.

Periods start from the debtor's 'Calculate interest from' date.

Periodic Interest Rate

Periodic Interest Rate is determined by Period and Annual Interest Rate.

For example:

An Annual Interest Rate of 12% applied to an account that is compounded monthly results in a Periodic Interest Rate of 0.01 This is calculated by dividing the Annual Interest Rate by the number of interest compounding conversions that are done in a year's time. (i.e. 0.12 / 12 = 0.01)

In the Interest Detail form, the Operator enters the Annual Interest Rate and chooses a Period. Collect! computes the Periodic Interest Rate from the Annual rate and the Period you choose.

Reset Interest

Interest calculations can be reset if there is a Judgement or change in interest rate. The calculation is based on the Judgement Principal and Interest. You may need to reset the interest calculation date. Select the Reset Interest button and press F1 for more help when the Reset Interest form is displayed.

Interest Adjustment

If you find that your figures do not tally, you may need to perform an Interest Adjustment. This only works if you posted an Original Principal Transaction (Type 196) when you setup the debtor.