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Late Fees

Introduction​

Late fees in Lendiom have evolved to handle more complex scenarios with the introduction of late fee tiers in Lendiom v0.36.0. This article explains how late fees are calculated, applied, and managed, including advanced features such as multiple tiers, grace periods, and flexible balances.

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Currently, rentals only support a single late fee tier.

Late Fee Tiers​

A late fee tier defines a specific charge for being late, independent of other tiers. Each tier operates on its own logic and is configured individually.

Tier Configuration​

Each tier has the following configurable options:

  • Days: The number of days after the due date when this late fee tier is applied.
  • Application: How the late fee is applied (e.g., to principal, balance, or next payment).
  • Charge Type: How the late fee is calculated (e.g., fixed or percentage).
  • Fixed and Percentage Amounts: Includes optional minimum and maximum limits for percentage-based fees.

Additional Tier Controls​

  • Disabled: When enabled, late fees will not be applied to any payments.
  • Tier Added Date: Tracks when a new tier is introduced, ensuring it does not retroactively affect previous payments.

Days (Grace Period)​

The Days value defines the grace period for each tier. For example:

  • If the due date is the 1st of the month and the grace period is 10 days, the late fee applies starting on the 11th.
  • Grace periods only include calendar days, not the due date itself.

Application​

Defines how the late fee is applied:

  1. First Part of Next Payment:
    • The late fee is deducted first from the next payment made.
    • Payments are allocated in the following order: Late Fee → Interest → Principal.
  2. Added to Late Fee Balance:
    • Late fees are added to the Flex Late Fee Balance and never deducted automatically.
  3. Added to Principal:
    • Late fees are appended to the remaining principal balance (available for loans only).

Charge Type​

Determines how the late fee amount is calculated:

  • Fixed: A preset amount that remains constant.
  • Percentage: A percentage of the balance due, with minimum and maximum values.

Example: Percentage Late Fee​

  • Percent: 4%
  • Minimum: $10
  • Maximum: $50

If the balance due is $800:

  • Fee = $800 × 4% = $32 (between the min/max range).

If the balance due is $200:

  • Fee = $200 × 4% = $8 (below the minimum, so the fee is $10).

Late Fee Balances​

Lendiom uses two types of late fee balances:

  1. Late Fee Balance:
    • Contains fees deducted automatically with payments.
    • Cleared as part of the regular payment process when the application is "First Part of Next Payment."
  2. Flex Late Fee Balance:
    • Contains fees that are manually managed.
    • Requires explicit user actions to clear, such as recording a late fee payment.

Applying Late Fees​

Late fees are applied using the following logic:

  1. Status Check: Late fees are only applied to loans with active statuses. Loans or Rentals in Draft mode are excluded.
  2. Grace Period Enforcement: A late fee is applied only after the grace period has elapsed.
  3. Transaction Association: Each late fee is tied to a specific transaction for accurate reversals.
  4. Duplicate Prevention: The system prevents the same tier from being applied multiple times for the same grace period. However, if recording late fees manually, it is possible to create duplicate late fees.
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If a payment is made after a late fee has already been applied, the late fee will remain tied to the original transaction. This ensures integrity when reversing payments or recalculating late fees.

Example​

  • Due Date: January 1st.
  • Grace Period: 10 days.
  • Payment Made: January 15th.
  • Late Fee Application:
    • Grace period ends January 11th.
    • A late fee is applied on January 12th.

Updating Late Fee Tiers​

Late fee tiers can be updated during a loan's or rental's lifecycle, but with the following restrictions:

  1. No Tier Removal: Tiers cannot be removed once applied to payments. This ensures integrity for existing transactions.
  2. Adding New Tiers: New tiers can be added at any time, but they will only apply to payments due after their addition date (Tier Added Date).
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When a tier is updated, all new late fees applied will use the updated configuration. Existing fees tied to prior transactions will remain unchanged.

Grace Period and Multi-Tier Handling​

When multiple tiers exist, each tier operates independently:

  • Grace Period Overlap: If a payment qualifies for multiple tiers (e.g., 10-day and 20-day grace periods), the system applies each tier sequentially as its grace period ends.
  • Tier Independence: Higher tiers (e.g., Tier 2) do not depend on the conditions of lower tiers (e.g., Tier 1) nor do they replace the lower tiers.

Reversing Late Fees​

When payments are reversed, associated late fees are also reversed:

  • Fees tied to specific tiers and transactions will be recalculated automatically.
  • Reversals respect the original tier logic to ensure accurate balances.

Example Scenarios​

Scenario 1: Single Tier with Fixed Fee​

  • Configuration:
    • Days: 10
    • Application: First Part of Next Payment
    • Charge Type: Fixed ($50)
  • Outcome:
    • A payment due on January 1st incurs a $50 late fee on January 11th.

Scenario 2: Multiple Tiers with Percentage Fee​

  • Configuration:
    • Tier 1: Days = 10, Application = Balance, Charge Type = Percentage (4%, Min: $10, Max: $50)
    • Tier 2: Days = 20, Application = Balance, Charge Type = Percentage (5%, Min: $20, Max: $100)
  • Outcome:
    • Payment due on January 1st incurs:
      • Tier 1 fee on January 11th.
      • Tier 2 fee on January 21st if still unpaid.

Word of Caution​

Late fees are powerful tools for managing payment compliance. However, it is crucial to clearly disclose how late fees are calculated and applied in contracts. Failure to do so may result in legal challenges.