Payment waterfall logic defines the contractual priority used to allocate each incoming payment between interest, principal, penalties, and fees. For example, a waterfall may require fees to be paid first, then interest, then principal. Loan servicing software enforces this allocation automatically. If a borrower makes a partial payment, the system applies it precisely according to the waterfall without altering historical balances. Without automated waterfall logic, manual allocation often introduces inconsistencies that later compromise audit accuracy and legal defensibility. The user will retain the right to modify this refund sequence in special circumstances.