Relatively new to FC..... be gentle!

Its a very good question, and this is only my attempt at an answer.

I assume you are referring to two loan parts at the same risk grade, since obviously the lower grade loans attract higher rates.

Within a band small loans generally go for lower rates than larger ones.

Additionally some loans are unpopular with lenders who may be suspicious of the companies finances, or dislike the lack of answers to questions. These will fill at higher rates allowing more room for the lenders to sell at a premium. Also where FC have listed more loans than average there can be a shortage of lender cash, forcing up loan rates for a short time.

You need to read the questions on a loan, check the comments and then make your own decision on whether the loan is a good buy.

As u rightly noted, you are paying an upfront premium. Well done for realising that from the start, not everyone does. You are right that paying the premium to get the higher rate looks a reasonable trade off. However, the cons are you are taking a punt on the loan running for its full duration. There are two events that can disrupt that:
- A borrower decides to pay the loan off early. This may happen for several reasons.
     - It may be what they originally intended but took out a longer loan in order to ease early cashflow pressure (a longer loan for the same amount @ the same rate will have smaller monthly payments)
     - It may be that the choose to increase their borrowing at later date and rollup into a new loan with the earlier loan being paid off (somewhat a point of contention amongst some lenders)
     - They may choose to refinance externally to FC (esp. if the rate they were paying was high)

- The loan might default

The former case is probably more of a worry in consideration of paying a premium than the latter. If the loan is repaid early then because you've paid a premium you can easily find that you've lost out (it will take sometime to recoup the premium via higher interest rate) relative to the alternative (or indeed in absolute terms if it is paid back very shortly after you purchased).

In the latter case (default) the premium is only a small %age of your at risk capital so is of less of a consideration as you have more to worry about.

Welcome Jazzmonkey - always room for new animals.

This has been covered and debated elsewhere but just to give a tidy reply. Let us assume that you are talking about two parts in the same loan and both available on the secondary market (SM). The percentage you buy at on the secondary market, the buyer rate, is a calculation which gives you your actual return assuming that you and the borrower hold the loan for the full period and all the payments are made. If this is the case then you will do better to take the higher buyer rate (one proviso coming later). However you are altering the pattern of the cash flow by paying a premium, in that your cash flow is more negative up front, by the effect of the premium, but then you get a higher actual interest rate which over the period of the loan compensates for the premium and then adds some benefit. I assume you know that when you buy without a premium the buyer rate and the interest rate are the same, but when you buy at a premium the interest rate you actually receive is higher than the buyer rate shown. In your example the interest rate from the loan part with the 3% premium is higher than the 12% buyer rate.

The problems come if you or the borrower decide not to hold the loan, because at a 3% premium it can take months just to regain the premium, and much longer to get to a parity with the loan part without premium. So if you pay 3% for your 12% loan part rather than 0% for your 11% loan part you should be pretty sure that you will not wish to sell it , that the borrower does not repay early (without penalty) and that the loan is a good one. Of course you may be able to sell at a 3% premium - but there is no guarantee of that and it is much easier to sell at par, or 0%, when you need the cash for whatever.

The proviso above is tax. If you pay income tax then you pay tax on the interest received, and so you will pay more tax on the 12% loan than the 11% loan. More than you might think because 12% is the buyer rate and you are probably a buying a loan part with a taxable interest rate of nearly 15%, compared with 11%. This tax difference is not in the buyer rate calculation and can whittle away the benefit you think you are getting, especially if a higher rate taxpayer.

In general it is better, more flexible, less risky, to buy without a premium. Obviously if you could buy your loan part at 12% without a premium, or with a discount, you would do so.