Term loans in Fineract: the seven decisions that define the product

A term loan is Fineract’s simplest product, and yet the creation screen has more than forty fields. Most have sensible defaults. Seven do not: each one changes the repayment schedule or the journal entry, and a wrong combination surfaces months later, when accounting cannot reconcile accrued interest.

1. Amortization method

Equal installments (fixed installment, French system) or Equal principal payments (constant principal, declining installment). In Latin American consumer and micro lending the norm is fixed installments; constant principal shows up in commercial portfolios. It is a product decision, but check it against the rulebook: “fixed installment” in a rulebook sometimes means fixed principal in practice.

2. Interest method

Declining balance or Flat (on the original amount for the whole life of the loan). Flat exists because some microfinance institutions have used it historically, but in most jurisdictions the resulting effective rate easily exceeds the usury cap. If the rulebook says “rate on outstanding balance”, it is declining balance, no debate.

3. Interest calculation period

Same as repayment period or Daily. With the first, each installment’s interest is computed over the full period regardless of the exact payment date. With Daily, every day counts and an early payment reduces the installment’s interest. Daily is what a client expects and what a regulator understands; Same as repayment period simplifies the book but produces disputes when someone pays on day 3 and is charged the full month.

4. Repayment strategy

Defines the order in which a payment covers penalties, interest, fees and principal. Fineract ships several (Penalties, Fees, Interest, Principal is the most common). This decision is rarely technical: it comes from the rulebook or local regulation. What is technical is verifying that the chosen strategy does what the rulebook says on a partial payment, which is where they all differ.

5. Days in year and month

Actual/Actual, Actual/365, 30/360. Changes the daily accrual and therefore the installment and the interest accumulated at period end. If the institution already has a portfolio in another system, this parameter must match the old system exactly or the migration never reconciles to the cent.

6. Accounting type

None, Cash, Accrual (periodic) or Accrual (upfront). With Cash, interest is recognized only when paid. With Accrual periodic, a daily job accrues interest into a receivable; the payment later clears it. For a regulated entity, Accrual periodic is the norm, and it requires defining accounts for: loan portfolio, interest receivable, interest income, fee income, penalty income, write-off, overpayment and fund source. Eight accounts minimum per product; with rules per office or per fund, many more.

7. Associated charges

A charge is created separately (Charges) and attached to the product. Its behavior is defined by the combination of calculation type (flat amount, % of amount, % of interest, % of amount plus interest) and timing (disbursement, specific installment, overdue, late). Each charge has its own income account. The classic trap: a disbursement fee as % of amount that the rulebook charges with VAT; the tax is not another charge, it is a separate configuration (tax group) chained to the charge.

The combination to avoid

Flat + Same as repayment period + Cash accounting. It yields a product that looks simple and that nobody can explain when a client prepays, when the loan is restructured, or when audit asks for the month’s accrual. If the institution is not ready for accrual, go with Declining balance + Daily + Cash: at least the schedule will be defensible and the later move to accrual will be purely an accounting change.

Before creating the product

Have the approved rulebook, the chart of accounts with the eight concepts, and one test case computed by hand in a spreadsheet (amount, rate, term, one early payment, one late payment). Fineract must reproduce that spreadsheet to the cent. If it doesn’t, one of the seven parameters is not what you think it is.