How to evaluate a % offer on SM

Hi stevio

The simple way is to look at the AER. 

The AER on a newly issued 12% loan paying monthly is 12.683%. If you can buy any loan on Ablrate at an AER higher than 12.683% then it is a better yield. 

I would also disagree that buying at 101 in a 12% market gives an identical result whichever loan you buy.

If you have a loan starting 28Feb16 and maturing 28Feb19 and buy it at 101 :

If you buy it on :

28Feb16 that is a 12.683% return
12Mar16 that is a 12.236% return
28Mar16 that is a 12.231% return
28Feb17 that is a 12.057% return
28Feb18 that is an 11.505% return


imho the only thing to look at on any loan is the AER and whilst we sometimes get knocked for being complicated, I would contend that we show exactly what investors should be looking at.

AER is the one to look at, but, as experienced investors already know, there are other dimensions to loans - some easy to see such as the ratio of the loan to the value of the security (LTV), and others not so obvious - such as other debt obligations, cross securitization, past behaviour of the borrower toward debt repayments and so on.
I'm not disagreeing with the points raised and answered in this thread - just adding something for the benefit of newbies who may be tempted to see p2p as a straight forward numbers game.

More generally, the AER assumes you hold the loan to term. If you pay a premium and do not hold to term (sell at par, say,) then that AER is lower. A discount is always a good thing, however.

The other point is that the AER does not take account of income tax. If you pay a premium you swap cash for an increased taxable income, at your marginal rate.

So if you see a good AER at a discount that's all good. If you see a good AER at a premium, think on't. 

(Oldnick's advice still applies of course.)

So, for example 1000054, even at what on the surface appears to have a hefty 2.95% premium (102.950%), due to the 16% interest rate, the APR is still 15.151%. So if I sold a loan at 12% APR to purchase this, I would likely still make a profit? (as long as it didn't repay early) 

Also, does the APR normally take into account amortising loans? (ie. do I need to do anything else to take this into consideration?)

Sorry, does APR also take into account the time remaining in a loan or just the year purchased (eg. does the APR on a loan with 3yrs left to run change if I buy in Jan or Dec because of the interest in that year or does it take into account the 3 year period?) 

The AER calculation takes account of everything (accurate to the day, I believe) provided that all contractual payments are made on time and in full.

Yes, that 16% loan at 102.95% is a bargain with 15.151% AER. Assuming it doesn't default, noticing that as well as security we have the middle man company protecting us. Assuming that, yes, selling a 12% AER deal would increase your expected return. Though do note the point about income tax made by blender, which reduces the gain a bit.

The loan contracts don't allow unconstrained early repayment by a borrower. Ablrate have said that if they do negotiate an early repayment they will address this issue in some way and to treat investors fairly I think that would have to allow for paying them a price sufficient to deliver them the AER shown when buying.

Yes, the AER takes account of amortising loans, telling you what you get on the money in the loan. The effect of the repayments reducing the balance you're getting the interest on and so spreading the premium or discount over gradually lower amounts is included.

For neither interest only nor amortising does it take account of the interest rate you get on any parts that are disposed of, by you selling or the monthly capital repayments. That money gets whatever rate you get on it.

An amortising loan might be a better or worse buy than a same AER and risk non-amortising loan for this reason. Better if you are just getting started, buying below platform average AER for newly issued loans because the repayments can presumably be reinvested at the higher average. Worse if you're getting an AER above platform average.

Amortising loans do have an important risk advantage. The amount borrowed is gradually reducing, so if the security value is not reducing or reducing by less, the loan is getting better protected by the security every month. Typically applies to deals secured on say a home or office building that isn't being redeveloped. You'd want amortising rather than non-amortising where the value of the security is decreasing over time because else the protection of the security would be gradually becoming a lower percentage of the amount borrowed.

So the waste to energy loan is amortising presumably in part because Ablrate knows that the equipment is decreasing in value over time. Though the fact that the company seems to be doing OK with sales is really more important to risk reduction - beats having to rely on the security, particularly where the resale market for the security might be limited.

Yes, it takes account of all the time remaining, not just the next twelve months or rest of the calendar year. That's why the mark up or down has a lower effect on longer loans than shorter, the effect is spread over a longer time.

AER and APR are different things, though APR used for borrowers in consumer credit lending is intended to have the same effect as the AER has in allowing easy comparison of deals.

What is the AER of a twelve month interest only loan paying 1% a month purchased on the day of issue? What is it six months after issue? How do those numbers change if it is amortising?

You're going to need help to get the right answers, whether the price is par or not.