If you levy an overdue finance charge on Monthly instalments that are not paid in time by the borrower then you can do it in either of the following ways
- Accrue the finance charges on the overdue amount on a daily basis
- Accrue the finance charges on the overdue amount on the next EMI date
There are pros and cons in both these methods. Lets examine each of the cases.
Accruing overdue amounts during the EOD cycle allows you to have a complete picture of the loan at the end of each day. Should the customer walk in the next day to foreclose the loan you will have the total dues at the click of a button without having to query and compute charges that haven't been posted. However the flipside is that each day's accrual entry will have to be reversed the subsequent day and new accrual entry has to be posted. This increases the number of records in the customer ledger.
The other method is to compute the overdue charges on the next EMI date. This allows customers to pay their EMI antime between the EMI due date and the next EMI due date. The bank staff and hence the customers are not aware that their is an overdue charge in the customer ledger untill the next EMI date. If during this period the customer approaches the Bank to foreclose the loan the Bank might end up losing the overdue charges since there is no receivable entry in the customer ledger.