#190922 - 05/17/0402:22 PMActual/360 vs 360 simple interest
What is the difference between calculating interest on an actual/360 basis and a 360-day simple interest basis? I need to check whether a loan payment listed in a note is right, and I'm using a calculator I designed in excel for actual/360 and it is not matching the note, which calculates the interest based on a 360-day simple interest basis, and I'm not sure how to adjust it. (for actual/360 I currently estimate the payment amount using the PMT function, by taking the rate times 365.25/360, which I adjust for any loan shorter than 4 years to get a pretty accurate estimate).
#190923 - 05/17/0403:33 PMRe: Actual/360 vs 360 simple interest
When you calculate 360, it's just the loan times the rate divided by 360(assuming 30 days in a month) 360/365 is the loan times the rate divided by 360 times the actual number of days in the month More interest is earned on 360/365
#190928 - 05/18/0402:25 PMRe: Actual/360 vs 360 simple interest
Basis is a very misunderstood concept in banking. The numerator refers to the number of days you count in a month. The denominator is the number of days you count in the year. If you look at it that way there are six possible accrual bases. 30/360, Actual/365, Actual/360, Actual/Actual, 30/360, 30/365 and 30/Actual. Most mortgage accruals are done on a 30/360 basis, consumer accruals are often on a Actual/365 and commercial accruals are often on either Actual/360 or Actual/Actual basis. However, none of this is "carved in stone."
Quote: If you look at it that way there are six possible accrual bases. 30/360, Actual/365, Actual/360, Actual/Actual, 30/360, 30/365 and 30/Actual. Most mortgage accruals are done on a 30/360 basis, consumer accruals are often on a Actual/365 and commercial accruals are often on either Actual/360 or Actual/Actual basis. However, none of this is "carved in stone."
I guess technically there are an infinite number of possible bases. I only say this because you included two that aren't really bases, just coding errors (30/365 and 30/Actual).
And I would say that secondary market investors have pretty much carved in stone what basis you're going to use on their loans!
#190931 - 05/18/0403:02 PMRe: Actual/360 vs 360 simple interest
I agree that investors do dictate what basis you use on loans that you are selling to them. That is why virtually all mortgages are done on a 30/360 basis. I also believe that for in-house paper you should accurately reflect what your accounting system does for a particular loan when you calculate it.
I would dispute your assertion that the two bases you mention are "coding errors." I am a vendor and both of those bases are used regularly by our users.
I don't see the business purpose for using such an accrual basis and reducing your yield by 11 basis points. The ONLY purpose I could think of would be to obtain the business by offering the borrower a lower effective rate while reporting the higher nominal rate to a superior (senior lender, board).
Loc: Silver Spring, Maryland, USA
if you are verifying the way the payment is posting on a note, there is a big difference on most LAS [loan accounting systems] between a 30/360 amortized and a 30/360 simple interest.
a 30/360 will break down according to a strictly amortized schedule no matter when the payment is made. So -- if the customer makes their April 1st payment in January or in July, the breakdown is pre-determined.
a simple interest 30/360 will usually either pay interest as billed or interest to the date the payment is made.
it is more difficult to reconcile the accrued interest on the notes too. On ITI, the daily accrual showing on the note is not on the current principal outstanding, but on the scheduled principal balance, which may be greater or less than the current principal. Then, when the note bills or a payoff is calculated, the LAS makes the adjustment to give the customer the benefit of any additional principal payments. It is rather convuluted, and I have had to justify it several times to auditors, regulators and examiners so that they can see that the customers are receiving the benefit of additional principal curtailments.
an ACTUAL/360 is an interest accrual that we use primarily for commercial customers. Consumers usually have an ACTUAL/365 accrual