Most borrowers understand they must meet the minimum payment amount by the payment due date, or their account may incur a late charge. However, what some borrowers don’t understand is that outstanding late charges or miscellaneous fees may be required before the minimum payment amount is satisfied. And if the borrower only makes the minimum payment amount, and late charges or fees are also part of the equation, they may still wind up with a late charge.

How come?

It all comes down to something we term “payment application.” The payment application tells the system how to apply payments in a determined order. The payment application can designate that principal and interest are met first, then any late charges, then any fees, then any additional funds after that can go toward paying down the principal.

Institutions and the type of loan determine the order of payments (or payment application).

This is best explained with real-life scenarios.

## Scenario 1:

Bill’s required minimum payment amount is $200. Bill makes a payment of $350. Additionally, Bill has $70 in outstanding late charges and a non-sufficient funds fee of $35.

The payment application is set in this order: late charges, fees, interest, principal.

Here’s how the system would apply this payment:

- $70 to late fees
- $35 to NSF fee
- $200 to the minimum loan payment (principal and interest)
- $45 extra to paying down additional principal

This scenario would also mean the current due date rolls to the next due date, meaning Bill would not get a late charge.

## Scenario 2:

Bill’s required minimum payment is $200. Bill makes a payment of $200. He also has $70 in late charges and an NSF fee of $35.

The payment application is set in this order: late charges, fees, interest, principal.

Here’s how the system would apply this payment:

- $70 to late fees
- $35 to NSF fee
- $95 to minimum payment
- Bill is short -$105 making his loan payment.

The due date only advances if the principal and interest payment are met, so in this scenario, the due date does not advance. He would likely be assessed a late charge that month because the minimum payment wasn’t met. However, there are options that your institution may choose to use that could help a borrower like Bill. Keep reading to find out more about those options.

## Scenario 3:

Bill’s required minimum payment is $200. Bill makes a payment of $200. He also has $70 in late charges and an NSF fee of $35.

The payment application is set in this order: principal, interest, late charges, fees

Here’s how the system would apply this payment:

- $200 to the minimum payment (principal and interest)
- $0 to late charges or NSF

The due date rolls to the next due date because the minimum payment was met. The past late charges and NSF would still be owed, but no new late charges would incur. Additionally, interest does not accrue on outstanding late charges or fees. It’s not uncommon to see this scenario with mortgage loans. Some borrowers may carryover a late charge or fees for months or even years if the borrower never makes a payment above the minimum amount.

## Additional Options

These three scenarios are simplistic examples of what the payment application is and why the order is so important. We have additional options that may also affect whether the due date rolls, so that the account does not incur a late charge.

One option that many institutions choose to use is the **Roll Due Date Within** option. Institutions can set this option to be based on an amount or a percentage. Here’s how that option works:

Let’s say Bill is $20 short of making the minimum monthly payment amount.

- If the
**Roll Due Date Within**option is set to $25, the due date would roll, and Bill would not incur a late charge because the remainder payment of $20 is less than the $25 amount set in the option. - If the
**Roll Due Date Within**option is set to 90*percent*, and bill paid $185 of his $200 minimum payment, the due date would roll because 90 percent of $200 is $20, and Bill’s payment is only $15 under the minimum payment.

Another option our system has is the **Entire Payment Rolls Due Date** option. This means that regardless of what the payment application designates, if a payment is made that totals the minimum payment, the system will roll the due date forward and the account will not incur a late charge.

For example, if a payment due is $100 and outstanding late charges of $40 are also due (payment application designates to pay late charges first and then the minimum payment), but the customer brings in a payment of only $100, the due date will still roll and the account will not incur a late charge, even though the system still applies the $40 of the payment to late charges first, then the remaining amount to the principal and interest.