Reminder about repayments
Most of October loans are amortised loans. Loans are repaid through annuities, which means that the borrower repays the same amount every month, for the duration of the loan. Part of the annuity is interest, the other part is capital.
Rounding adjustments on repayments
When we generate an individual repayment schedule, we calculate the amount of capital and interest to be repaid to the lender with 6 decimals, which appears on the Excel file summing up the repayments and available on the Summary tab of the Portfolio.
Nevertheless, money transfers cannot handle more than 2 decimals. Therefore, the amount transferred to the Lender's October account has to be rounded.
How does October round repayments?
October uses truncation to handle repayments. The amount transferred to the Lender's October account each month is truncated to the lower cent. Amounts pending to be paid are summed up each month until they exceed a cent. The following month, this pending cent is added to the principal repayments and paid to the lender.
Let's take an example of a lender with a monthly instalment of €10.0055.
- Month 1: October credits €10.00 to his October Account. Therefore, October still owes the lender €0.0055.
- Month 2: the amount due to the lender is €10.0110 (€10.0055 + €0.0055). October trunks to the lower cent and transfers €10.01. October now owes the lender €0.0010.
- Month 3: the amount due to the lender is €10.0065 (€10.0055 + €0.0010). October repays €10.00 to the lender and will add the pending €0.0065 to the next instalment.
Lenders are being repaid the rounded amount on one instalment on the following ones, except for the last instalment. Therefore, the maximum amount that might be lost because of rounding on each project is 0.0099€.
Special cases: what happens when we add new transactions on the repayment schedule
If there is a change on the initial repayment schedule (if a company repays early, if we receive a regularisation payment for a defaulted project or if the loan is rescheduled), the rounding is done on the Borrower's overall repayment schedule and not on the individual repayment schedules of the lenders who invested in the project. This has an impact on how the repayments will be displayed on the Lenders' portfolio.
In these cases, the total amount (including principal and interest) to be repaid by the Borrower to pay back the loan is rounded to the nearest cent (contrary to the other repayments that are truncated to the lower cent) and divided among each lender, using a pro rata distribution. With this rounding method, the maximum amount that might be lost or earned because of rounding on each project is 0.0049€.
First, we calculate how much each lender has to receive and then we calculate the split between capital and interest for each of them.
How do we calculate the split between principal and interest to be repaid to lenders?
We decided not to round the amount of interest to be repaid to lenders, which is expressed with 6 decimals. This exact amount of interest is an accounting amount and does not represent an actual cash flow. Following, we will refer to this accounting amount as "Total amount of interest".
In order to calculate the amount of principal, we use the following formula:
Total amount repaid to lenders - Total amount of interest
= Total amount of principal
The principal to be repaid is calculated as the difference between the total amount repaid, which is an actual cash flow and the total amount of interest, which is a conceptual amount.
Due to the rounding, there can be a difference of 0.0049€ on the total amount repaid to lenders. The missing fraction of a cent on the repayment amount is therefore reflected on the amount of capital repaid rather than on the interest. Therefore, when you consider that you're 1 cent short of the principal, that's actually because we've paid you an extra cent in interest. And there is no taxation on 1 cent. What really matters is the amount you get more than the principal-interest split.
This rounding system ensures you will not lose more than 1 cent on each project and makes it as fair as possible for all.