Variable Interest

Variable Interest.

1. Purpose

Variable Interest module allows variable interest component attaching to Contracts and Loans. Most often, it is 3, 6 or 12 month EURIBOR (Euro Interbank Offered Rate). Variable interest change periodical activity is included also and is able to update interest rate on the Contracts and Loans when the variable interest change date comes.

2.Variable Interest setup

You have to setup Variable Interest you are going to use in the leasing company first. Open Variable Interest list by typing “Variable Interest” in search box and create a new records there. See the Figure 1 Variable Interest codes for reference.

Figure 1 Variable Interest codes

Code identifies variable interest origin and purpose. We recommend using short and wide known abbreviations, which improves user experience.
Description contains full variable interest name, which usually comes from central bank.
Select Frequency Code to define the time period when next variable interest update occurs on a Contract or Loan.
You must select Currency Code if you are going to use Variable Interest for financial products with foreign currency. Most often variable interest description itself already defines currency used for it.
First Fixed Change Date used to define fixed dates when the variable interest rate will be updated on a Contracts and Loans. Refer to
Planning the Variable Interest change strategy topic to learn more about the field’s impact.
Flag Use Zero For Negative Rates if you want to apply zero interest rate on Contract or Loan instead of actual negative rate.
Valid Rate As Of [CURRENT DATE] shows valid interest rate as of Dynamics NAV WORKDATE. Note it will show zero for negative rates if Use Zero For Negative Rates is flagged. Click Rates action on the ribbon for actual rates and historical data.
Fixed Interest Change Dates In This Year shows when interest update will be triggered in this year if Fixed Date Variable Interest Change Method is selected on a Contract or Loan. Refer to chapter “Planning the Variable Interest change strategy“ to learn more about the field’s impact.
Rates action on the ribbon allows you to input actual interest rate you can find on external sources like http://www.euribor-rates.eu/ . See the Figure 2 Variable Interest Rates for reference.

Figure 2 Variable Interest Rates

Open Program list by typing “Programs” in search box if you want to have standard variable interest related values assigned to Contract when the officer selects a Program on a Quote or Application.

Figure 3 Program setup

Variable Interest Code is a standard variable interest code value for a Contract. The officer can amend this value manually if required.
Var. Int. Initial Date Method also will become a standard value for corresponding field on a Contract. You have 3 options to choose: Contract Date, Contract Date – 2D, Contract Date – 1D. We recommend selecting Contract Date – 2D because most often you will not have the precise variable interest rate for a current date which is also Contract Date by default.
Var. Int. Change Method defines standard Contract’s value for variable interest rate update strategy. Refer to Planning the Variable Interest change strategy chapter to learn more.

3. Planning the Variable Interest change strategy

It is very important to understand and choose carefully interest change strategy before you start actually using it. There are two options available: Contract/Installment Date and Fixed Date. Let’s take an example to see the difference.

You created Leasing Contract on 10th of February of 2023 with the MONTHLY payment frequency. The first installment day is on 10th of March of 2023, the second on 10th of April and so on. You apply 3 months Euribor variable interest to Contract and you decided that fixed interest change dates for 3 Month Euribor will be 5th of January, 5th of April, 5 of July and 5th of October.
If you choose to select Fixed Date Variable Interest Change Method on the Contract then next interest change date will be set to nearest future fixed 3 month Euribor change date which is 5th of April in our case. That means the first Interest rate update on the Contract will be performed after 2 months and 5 days. The second and all other following updates will be run after each 3 month and will match fixed change dates for 3 months Euribor.
If you choose to select Contract/Installment Date Variable Interest Change Method on the Contract then next interest change date will be set exactly after 3 month starting from Contract Date which is 10th of May. The second and all other following updates will be run after each 3 month and will match installment schedule dates.

The benefit of having Fixed Date strategy is a fixed small number annual variable interest updates. The smaller effort is needed to run and verify this complex update process because leasing company has to inform customers after each interest update, investigate the possible errors and etc. The drawback is that you normally want to update variable interest on installment payment date or as close as possible to it and you would try to have all installment schedule with repayment date 5th of each month (according to an example above) and this can be impossible depending on internal business rules.
The benefit of having Contract/Installment Date strategy is more transparent variable interest update process for Customer because it is always run using the same time period. The drawback of it is that variable interest process actually becomes a daily batch job managed by leasing company staff.

4. Variable Interest on a Contract

Open Quote or Application card and navigate to Financing fasttab. You can see Interest APR field providing short summary of interest applied (see the Figure 4 Interest on a Quote card).

Figure 4 Interest on a Quote card

Margin % - defines margin % on quote.
Margin % Manual – if enabled Margin % is editable.
Minimum % (Var.Rate + Margin) – defines minimum total Interest APR.

Click on Assist Edit button next to this field. The page with variable interest details pops up.

Figure 5 Schedule Variable Interest Details

Variable Interest Code allows you to select the variable interest code you need. Field’s Variable Interest % value is updated every time you change Variable Interest Code. Initial value comes from Program automatically.
Variable Interest Initial Date Method comes automatically from the Program but is possible to update manually. There are three options: Contract Date, Contract Date – 1D, Contract Date – 2D. The purpose of the field is to calculate Variable Interest Initial Date value from Contract Date. Usually you will not use an option Contract Date because variable interest rate appears in the system with some delay and is unknown as of today.
Variable Interest Initial Date together with Variable Interest Code allows to get and populate automatically field’s Variable Interest % value.
Variable Interest Initial Date is Final purpose is to lock field’s Variable Interest Initial Date value. Otherwise, system updates it automatically every time the officer changes Contract Date.
Field Interest % shows the fixed interest rate applied to Contract.
If Interest % Manual is enabled, than** Interest %** is editable.
Variable Interest % field is updated automatically by the system and depends on Variable Interest Code and Variable Interest Initial Date values.
Interest Rate is a total annual interest rate, which is a sum of Interest % and Variable Interest %.
Variable Interest Change Method has two options: Contract/Installment Date and Fixed Date. Initial value comes from Program automatically. The field drives Variable Interest Next Change Date calculation. Refer to chapter Planning the Variable Interest change strategy” to learn more how it works.
Variable Interest Next Change Date is automatically calculated field and shows the next date when Variable Interest % value is updated.
Variable Interest Last Change Date and Variable Interest Last Change Date (Actual) are updated automatically by Variable Interest Update activity.
Click Variable Interest History action on a ribbon to review variable interest change history. System creates a new history record automatically every time the variable interest rate changes for the active Contract (not for Quote or Application).

Figure 6 Variable Interest History

5. Variable Interest on a Loan

Variable interest apply to Loans also, not to Contracts only. The logic and fields are the same as on a Contract. The difference here is that Date field instead of Contract Date used to calculate Variable Interest Initial Date.

Figure 7 Interest on Loan card

6. Variable Interest update

You must update Variable Interest % for every Contract and Loan whenever Variable Interest Next Change Date comes. Periodical task Variable Interest Update Activity performs this action, it can be found by typing “Variable Interest Update Activity” in search box. You can run it manually or you can set up a Job Queue entry to run it daily. The parameter Until Next Change Date is set automatically to WORKDATE when the function is launched but you can override the value manually (see the screenshot Figure 8 Variable Interest Update Activity). It is critical to have the most recent variable interest rates in the system before you run this action.

Figure 8 Variable Interest Update Activity

This function loops all installment schedules where Status is Application or Contract and Version Status is Valid or New. In addition, Variable Interest Code must not be blank and Var. Int. Next Change Date has to be equal or older than date parameter for Variable Interest Update Activity. Function steps follow:

Verify if Var. Int. Next Change Date is not blank and all installments before or equal to Var. Int. Next Change Date are invoiced.

Calculate Next interest adjustment date. If field Var. Int. Change Method value is Contract/Installment Date and next payment date occurs between payments then the next interest adjustment date is adjusted back to payment date to match installment dates.

Retrieve new Variable Interest rate using current, not yet updated, Var. Int. Next Change Date value.

Update Variable Interest % on installment schedule and create Variable Interest History record. Schedule field Var. Int. Last Ch. Date (Act.) gets TODAY value and Var. Int. Last Change Date becomes equal to previous Var. Int. Next Change Date value.

Recalculate installment schedule lines using a new interest rate. Note that the process does not create a new schedule version.

Exactly the same logic applies to Loan because the function loops all Loans with Status Confirmed or Re-Opened, Variable Interest Code is not blank and Var. Int. Next Change Date is equal or older than date parameter for Variable Interest Update Activity.

Each function run creates records in a Warning Log Sys (see the screenshot Figure 9 Activities Log). Record with Severity = Info gives the number of Schedules and Loans affected by this function run and the number of errors if they were found. The officer must review all Critical log records and fix the issues after each Variable Interest Update Activity run. After fixing all issues, the activity must run again until no new Critical errors appear in the log.

Figure 9 Warning Log Sys

7. Interest variation for active contract

To change contract interest from fixed to variable or vice versa you must open a contract card and navigate to Variations -> Change Interest (Figure 10).

Figure 10 Navigation to "Change Interest" page

In the General fasttab, these are the key fields for variable interest change (Figure 11):
Variable Interest Code – this field can either be empty or filled. If you need to switch from fixed interest to variable or change variable interest code you must select one of the values from the dropdown list. After selecting a new code or deleting it system displays notification asking to recalculate installment schedule. On recalculation not invoiced schedule installments are updated to reflect interest rate impact.
Changing Variable Interest Code value system updates Variable Interest % and Total Interest % fields automatically. If no code is selected, then Variable Interest % is zero.

Figure 11 Variable Interest variation

You can ammend list of variable interest codes in the Variable Interest Setup page (Figure 12), if required. To get more information about this page, refer to Variable Interest setup chapter.

Figure 12 Variable Interest Code setup page