Variable interest rate loan is one in which the interest component of payable loan can fluctuate over time. Fluctuation can be either due to periodic changes in index rate or varying interest rates in market. Accordingly, loan amount may increase or decrease depending on variable interest rate.

For Variable rate loans, the interest rate basically consists of two components:

• Index rate - The index rate component is based on the financial market and may fluctuate accordingly.
• Margin rate - The margin rate component is the fixed rate, which normally does not change during life of the loan.

  Note:

  Interest rate = Index rate + Margin rate.

During loan origination and up to the funding process, the interest rate is computed based on the prevailing index rate at the time of approval. However, once the loan is funded, the interest rate on the loan may change when the index rate changes. This interest rate change may causes changes in the loan's repayment amount, if specified in the terms of the contract.

Oracle Financial Services Lending and Leasing supports the variable rate functionality for closed-end loans during the originating, funding, and servicing of new products and loans with interest rates based on various industry-standard interest rate indices.

During the Product setup, you can define and control the changes in loan payment amount using Reschedule Method and Reschedule Value fields.

• When Reschedule Method is selected as UNDEFINED, no payment changes are allowed.
• When Reschedule Method is selected as CHANGE PAYMENT, and Reschedule Value is specified as 0, loan payment amount changes every time depending on the variable rate.
• When Reschedule Method is selected as CHANGE PAYMENT, and Reschedule Value is specified in percentage (i.e. 5%, 10%) loan payment amount changes only when the variable rate increases upto the defined percentage. (For example, if change percentage is specified as 10%, loan payment amount changes only if the variable rate increases by 10%. Else, no change is allowed.)

Hence the impact of variable rates on loan payment amount can be controlled to stop negative amortization.

This section consists of the following topic:

• 'Rate Adjustments' for Variable Rate Loans