When a payment is applied for less than the interest due, the unpaid interest has to be carried somehow. NoteHarbor supports two treatments, chosen per loan in the wizard's terms step or in Edit Loan:
- Installment carry (the default) — the unpaid interest stays on the still-due installment. It remains the next payment's target and is collected through that installment's remaining amounts, in the loan's payment waterfall order. This is exactly how NoteHarbor has always worked.
- US Rule (no interest-on-interest) — the classic United States Rule: the unpaid interest is carried as a separate interest deficiency that future payments satisfy first. Interest is promoted to the front of the loan's waterfall, the carried deficiency shows on the loan header whenever it's non-zero, and payoff quotes/letters and the borrower portal include it — paying off the note settles it.
What the US Rule guarantees
The deficiency is never added to principal and never accrues interest itself — the schedule's future interest is computed exactly as if the shortfall had never happened. The borrower can be behind on interest; they are never charged interest on interest.
Changing it on an existing loan
It's a real term of the note, so changing it is an audited edit. On a loan with recorded payments, NoteHarbor re-applies every surviving payment under the new treatment (the same whole-loan recalculation a payment-order change runs) and re-derives the deficiency from the actual payments. Make the change in its own save; balloon notes, rate riders, modified/extended loans, and synced investor copies are refused with a clear message because their history can't be faithfully re-applied.
The treatment affects how interest is applied and reported for taxes (1098 figures follow the interest actually collected). Confirm the correct treatment for this note with your CPA. See also Partial payments & suspense.