Daily Value of interest

[emmetttrudy]

A participant has a loan set up with quarterly repayments. They would like to pay off the outstanding balance as of 12/1/2011. The prior repayment was made on 9/30/2011, and the next is due 12/31/2011. My thinking was that a daily interest calculation needs to be done to calculate the payoff amount at a date other than a date that shows on the amortization schedule - to calculate the additional interest accrued from 10/1 to 12/1. But others I speak to seem to think this is not required, and that the payoff balance at any date from 10/1 to 12/31 is the amount that shows up on the amortization schedule as the outstanding balance after the 9/30 payment was made.

Most vendors with a daily platform (ING, Hancock, Hartford, etc.) calculate interest on loans daily. It wouldnt make sense just because this loan is through a vendor without a daily platform, that the interest is calculated differenty.

Is there any guidance on this issue? Must it be done one way or the other?

[Bird]

If it's not in the loan documentation, and it might not be, then use your best judgment. My own best judgment is to estimate the interest, so if it's a month after the payment, use 1/12 of the annual rate times the outstanding principal after the last payment.

(It raises an interesting, if trivial question, because (I think) most amortization schedules are based on compounding on the payment frequency, yet effectively, the daily val recordkeepers are compounding daily. Is that a problem? Not really, because at the end of the term, they'll generally just wipe out any remaining "balance" on their books if all payments are made. Yet if I recall correctly, they only update the interest when a payment is made, so if someone is way late and in default, the "balance" on the default date is understated, unless we tell them to override. But I don't think anyone is checking this too carefully!)