Follow the steps described below to set up the account type interest method with floating interest.

1. Go to Accounts > Pricing > Account type interest.

2. Click the Create account type interest method button.

3. Fill in the details for the:
4. Click the Create new account type interest button.

In the interest main settings you have the option to choose between two methods for determining the effective interest rate:

1. Forming the applied interest rate as a percentage of the base rate;

2. Forming the applied interest rate as a constant difference from the base rate.

You can find examples explaining each of these options below.

Configuring margin type and default margin rate

Let's assume you would like the effective rate to be 60% of the base rate. Then, you should make the following configuration selection:

• Select the margin type value percentage of the base rate that is subtracted from the base rate,

• Set the default margin rate value to 40% (100% - 40% = 60%).

Adding min and max margins

Minimum and maximum margin rates act as boundaries for manual adjustments to the effective rate of one particular account. Let's assume you want to restrict the manual adjustment of the effective rate to a maximum of 80% and a minimum of 40% of the base rate. Then, you should set:

• Min margin rate to 20% (100% - 80% = 20%),

• Max margin rate to 60% (100% - 60% = 40%).

Configuring margin type and default margin rate

Let's assume you would like the effective rate to be 2% less than the base rate. Then, you should make the following configuration selection:

• Select the margin type value fixed percentage that is subtracted from the base rate,

• Set the default margin rate value to 2%.

Adding min and max margins

Minimum and maximum margin rates act as boundaries for manual adjustments to the effective rate. Let's assume you want to limit the manual adjustment of the effective rate difference from the base rate to 3% maximum and 1% minimum. Then, you should set:

• Min margin rate to 1%,

• Max margin rate to 3%.

The purpose of the explanatory examples on this page is to assist you in selecting between two methods of calculating effective interest rates.

Sample use case

Suppose we have to set up two floating interest rates.

1. The first set is named Effective interest rate as a percentage.

   • Margin type = Percentage of the base rate that is subtracted from the base rate.

   • Default margin rate = 40%.

2. The second set is named Effective interest rate as a difference.

   • Margin type = Fixed percentage that is subtracted from the base rate.

   • Default margin rate = 2%.

The picture below shows how effective interest rates change with different base rates:

1. Base rate of 5%

2. Moderate increase to 7%

3. Moderate decline to 3%

4. Substantial decline to 1%

Example details

The differences summarised

To choose between two margin type configurations for floating interest, consider these differences:

• The effective interest rate, calculated as the difference between the base rate and the margin rate, is more sensitive to changes of the base rate than the interest rate calculated as a percentage of the base rate.

• The effective interest rate calculated as the difference between the base rate and the margin rate, becomes 0 when the base rate drops below the default margin rate.

• The effective interest rate, calculated as a percentage of the base rate, is positive as long as the base rate is positive.

To make the floating interest rate dynamic, you must update the base rate value as it changes over time. Here, you can learn how to manage such base rate updates so that they are applied accurately.

The process of introducing the new base rate value consists of two steps:

1. Manually adding the new base rate fixing,

2. Automatically applying the new base rate value for interest calculation.

Adding the new base rate fixing

Automatic application of the new base rate fixing

Below are the high-level steps for automatically applying the new base rate, explained with a numerical example.

Let's assume you have made in the past the following configuration:

• Selected the margin type value fixed percentage that is subtracted from the base rate,

• Set the default margin rate value to 2%,

• Fixed the base rate to 5%.

It means the effective interest rate applied for the account interest rate calculation is 3%.

Today, on day D, you will set a new base rate of 7%, with the fixing date tomorrow (D+1).

During the day change process, transferring banking day from D to D+1, the following activities will be performed.

• Calculating interest accruals for today with a current effective interest rate of 3%.

• Discovering new base rate fixing 7% for the next day D+1.

• Calculating the new effective interest rate 7% - 2% = 5% for that account type interest method.

• Applying the new effective interest rate of 5% for accounts using this account type interest method.

During the next day change process, transferring banking day from D+1 to D+2, interest accruals for D+1 are calculated with an effective interest rate of 5%.

About floating interest

In this guide, you can learn how to set up and handle the floating interest for accounts. You can find information about:

• foundational working principles of floating interest for accounts,

• limitations you should consider before going forward with the floating interest method for accounts,

• configuration options explained,

• explanatory examples for choosing the appropriate configuration option for your needs,

• how to control the base rate updates.

Working concepts

When using floating interest for an account, the effective interest rate applied is calculated by subtracting the margin rate from the base rate.

Limitations to consider

Before applying floating interest to calculate account interest, it is essential to consider the following limitations of this calculation method.