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Post by southseacompany on Jan 28, 2019 5:20:48 GMT
Strangely, some P2P sites don't actually define what they mean when they say things like "an interest rate of 12%", even though that can make quite a difference. For example, for a loan with monthly payments, a nominal rate of 12% p.a. corresponds to an AER of 12.68%.
(There are different names for the idea of computing returns corrected for the effect of compounding during the year. Savings accounts are often quoted with AER, or Annual Equivalent Rate, while bond returns are expressed with CAGR, or Compound Annual Growth Rate, but the concepts are identical. Internal rate of return (X)IRR also equals AER/CAGR when there are no deposits or withdrawals during the year.)
So I decided to confirm it quickly from first principles instead of trying to parse what the platforms say. I picked a randomly selected loan from my portfolio on Mintos and double-checked their calculations, concluding that the quoted price is without question a nominal rate. I suppose (but haven't checked) this also means that the yield to maturity listed in the secondary market is a nominal value. A similar test on Robocash shows that they too use nominal rates, but calculated using a year length of 365 days instead of 360 days as is customary in finance.
A quick look at British P2P sites suggests that they -- at least Zopa and RateSetter -- use AER, so merely comparing the offered rates directly would overstate their returns relative to Mintos, Robocash and others who use nominal rates.
Has anyone given this thought or verified the calculations on other platforms? Or is this a level of detail P2P investors don't much care about?
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Post by geoffrey on Feb 3, 2019 14:57:26 GMT
I've always felt that providing AER-based compound-equivalent rates for P2P lenders is misleading on many platforms, when there is no guarantee of re-investing all proceeds at the same rate as the capital sum or in a timely manner. It is essential for these lenders to quote AER for borrowers, but for lenders it is misleading because the rate is pretty much unattainable in most cases. You can see why they like to quote these unrealistic rates, since it makes the return look better than it is.
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Post by southseacompany on Feb 4, 2019 7:34:27 GMT
Cash drag is an important factor, but the nominal rate does not treat it correctly either, unless you assume you can only reinvest once per year. Twino used to show both types return percentages but doesn't do it anymore, so it seems to have been confusing for a lot of people.
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