Q - How do you model a loan made by your client and the associated repayments that are paid to the client?
I have cases where the client is receiving repayments on a personal loan to relative. Also, in some cases, the client is a company director who is receiving loan repayments from a business.
For example, my client has loaned money to a member of the family and is expecting it to be repaid (unlike any loans to my kids!).
A - Consider modelling the loan in Adviser Go or modelling as a combination of asset and income in Adviser.
In Adviser there isn't a specific option for modelling loans your client has made. However, this can be done in AdviserGo, click here for instructions. If added in AdviserGo, you will be able to see the output in Adviser. We recommend using the specific functionality in AdviserGo to model this.
That said, if you don't want to us AdviserGo and you want to add the loan and repayments in Adviser you could consider modelling them as a combination of asset and income as per the steps below:
1. To start, go to the Time screen and place an event onto the timeline in the year that the loan should be paid back. You will use this in a moment.
2. Next, go to the Investments screen. Create an Unwrapped Investment and place in it the funds paid back to date.
3. The starting balance of this investment (the loan) should probably be reflective of the balance paid back to date on the loan or at least the funds that remain liquid that have not been reused for other purposes.
Be sure to set the Purchase Value to equal the Balance. Doing so will ensure that no CGT would be incurred.
Enter in the Contribution field the amount that is being repaid annually on the loan, inclusive of interest. The loan repayments will be deposited as contributions.
On the Time panel, to right side of the screen, select the Event tab and set the period over which contributions/repayments are to be received. For example, select Start (green dot) to begin the repayments and the "End of Payments" event (added earlier), to indicate when repayments are to end (red dot).
Under Advanced Settings > Contributions select "Contribute before paying expenses".
Note: This setting will ensure that the repayments, which you will add in a moment as an inflow, are intercepted and deposited into this account (the loan) before they could be used to pay expenses.
Also under Advanced Settings > Growth & Yield set the Growth, yields, and Fees to 0%.
Be sure that Use Asset Allocation is unticked.
Under Advanced Settings > Liquidation Limits / Planned Withdrawals, consider setting the release date for these funds to the "End of Loan Repayments" event. This will prevent the software from drawing any funds before that time to help top-up income. These funds will be released on or after the loan is repaid.
Next, model the inflow of repayments.
Go to the Other Income screen.
Enter the amount of the loan repayments. This "income" should match the amount you entered earlier as a contribution to the unwrapped investment. You will probably set this income as being non-taxable (i.e. net of any taxes).
Just as you did on the Investments screen, on the Time panel, to right side of the screen, set the period over which contributions/repayments are to be received. For example, select Start (green dot) to begin the repayments. Deselect the red dot next to Retirement and click instead the "End of Loan Repayments" event (added earlier) to indicate when repayments are to end (red dot).
Go to Advanced Settings > Income Growth and set the Growth Rate to 0%.
These entries should give you the inflow, simulating repayments received, which will then be deposited into the pot of repaid loan funds, which will be tracked as an asset.
In simple terms, the results would look something like this.