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Post by masquedefer on Aug 2, 2014 14:21:03 GMT
Hello I wonder if anyone can tell me why I am seeing loan parts for resale at good rates yet still providing a 3% premium to the seller. e.g. I am buying some C- loan part @ 13% buyer rate and yet the seller is getting a 3% premium. I can't remember ever seeing any original bidders getting 16% for C- loans and the FC stats show that the best rates were at about 14.8% (which incidentally I have never seen when I bid - typically 13.0 to 13.4% is the best last minute bids that I have seen). Is FC somehow managing to secretly bid @ 16% and not telling us and then selling them on @ 13% to make a nice sideline profit?  ? |
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baldpate
Member of DD Central
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Post by baldpate on Aug 2, 2014 16:03:25 GMT
The 3% premium is calculated on the Principal amount of the loan part, but cannnot be applied directly to the interest rate. Consider for example a £100 part in a 5-year loan, for which you pay £103, thus reducing the effective rate of interest you will receive (buyers rate) ; however, that interest rate reduction is not 3%, but quite a bit less because the cost (£3) of your purchase has to be amortised over 5 years, the term of the loan.
If instead the term of the loan were just 1 year, then the interest rate reduction would indeed be about 3%.
If you have actually bought the part you described (paying 3% premium for a 13% buyer rate), then you can see what interest rate the borrower is paying by going to the Sell tab & selecting Sell individually ; find the loan part in question, and you will see the true interest rate in the Buyer Rate column (provided the Premium is left at 0).
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Post by bracknellboy on Aug 2, 2014 17:00:47 GMT
while that is all correct, I think it is potentially confusing for someone who didn't get the premium model in the first place. Another way of summarising it is to say that premium is a premium you are paying on the capital, not a direct deduction off the interest rate. So for example if the rate on this £100 loan part is 14%, you will continue to receive 14% on the (amortising) £100 loan part, but you are paying £103 to acquire it, and therefore the effective rate you will achieve on your £103 outlay will be less. How much less this equates to will depend on the length of the loan. The shorter the loan, the greater the negative impact on the effective rate on your £103: a) because you are shelling out £3 upfront and the shorter the loan the less time over which to reduce the effect b) on a shorter loan the capital will be paid back more quickly and so the balance on £100 on which you start out receiving 14% will reduce more quickly.
Maybe that's more confusing.....
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baldpate
Member of DD Central
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Post by baldpate on Aug 2, 2014 17:34:41 GMT
Another thing to remember when buying at a premium is the early-redemption risk. If the borrower opts to pay off the loan before term you will receive an effective rate which is even less than the stated buyer rate (which is calculated on the assumption of the loan running it's full term). Indeed, if the buyer pays back after only a few months, you may not even cover your costs : it happened to me!
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Post by GSV3MIaC on Aug 2, 2014 20:50:31 GMT
<snip> If instead the term of the loan were just 1 year, then the interest rate reduction would indeed be about 3%. No actually it'd be more like 6%, unless it was an interest only loan, because the 3% is amortised over 1 year over the =average amount outstanding= which is (to very rough approximation) half the initial amount.
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Post by masquedefer on Aug 3, 2014 6:26:15 GMT
Thank you all for your explanations.
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baldpate
Member of DD Central
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Post by baldpate on Aug 3, 2014 8:24:55 GMT
No actually it'd be more like 6%, unless it was an interest only loan, because the 3% is amortised over 1 year over the =average amount outstanding= which is (to very rough approximation) half the initial amount. Oops! My mistake - thanks for pointing that out.
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