NetLoan - Simple or Precision Loans (Loan Calculation Accounting)
There are two primary ways to account for a loan in NetLoan, which have a major impact on the way the schedule is ultimately generated. These two methods are (1) Simple and (2) Precision and have the largest impact on the timing of payments, as well as the calculation and allocation of interest on the loan balance in each period.
This loan accounting method is determined at two settings hierarchy levels in NetLoan. First, at the global hierarchy under NetLoan Setup (see image below):
The second is at the next settings hierarchy level down on the Loan Type (see image below):
In addition to the Loan Calculation Accounting field, there are several other key fields related specifically to "Precision" calculation methods that should be highlighted. The most significant of these are:
Payment Day - The day of the month the payment is being posted on the schedule (this impacts the proportion of the payment that gets allocated to interest).
Day Count Convention - This field determines the month and year day count assumptions for calculating daily interest up to a full month period.
Business Day Convention - This field enables NetLoan to adjust the payment day to account for holidays, weekends, and new periods.
Interest Capitalization Frequency - This field tells NetLoan whether and when to capitalize unpaid, accumulated interest amounts to the loan balance. Options included are to capitalize at the end of each period, on the payment day (if applicable), both, or never.
Simple Loan
A "simple" loan alludes to the notion that the interest calculation is an even, straightforward interest calculation. This would almost be the equivalent of a 30/360 day count convention under a precision loan, meaning that the interest calculation is assuming completely uniform/even periods.
30 days per month x 12 months per year = 360 days.
The additional caveat with a simple loan, however, is that payments will always be assumed to be made on the last day of the period so that each period is only allocated one schedule line as opposed to the precision loan schedule (next section below).
Precision Loan
Precision loans allow for much greater flexibility and level of detail in terms of how interest is both calculated and allocated to payments throughout each period. As you can see in the image below, payments on this loan are always being made on the 13th of the month, which means there is a second schedule line for each period to reflect the accrued interest that must either be capitalized to the loan balance or accumulated over to the following period.
In this particular example (image above), the loan is also a balloon type loan with interest only payments so that the actual loan balance never decreases (or increases) until the final payment for the full loan amount.
Summary
Simple loan types should be used if you prefer to ignore loan payment days; assume even, monthly interest calculations for each period, and avoid double entries for each month that breakout the payment from the accrued interest.
Precision loan types should be chosen if you really need to dial in deeper on the interest calculation for your loans.