fric
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Post by fric on Jul 24, 2017 6:41:53 GMT
Just curious, looking purely at the mathematical side of loans, does loan term influences how much I profit (assuming all the loans have the same interest rate)? For longer loans you see that people pay a lot more in interest, but they barely pay any principal at the beginning. How do they compare to shorter loans that repay principal faster? Or does it even out over longer period of time?
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kulerucket
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Post by kulerucket on Jul 24, 2017 7:10:15 GMT
Just curious, looking purely at the mathematical side of loans, does loan term influences how much I profit (assuming all the loans have the same interest rate)? For longer loans you see that people pay a lot more in interest, but they barely pay any principal at the beginning. How do they compare to shorter loans that repay principal faster? Or does it even out over longer period of time? If you assume that your short term loan payments can always be reinvested straight away, it makes no difference even in the short term. It doesn't just even out over a longer period, it is always even each and every day. This is because it makes no difference if the principal stays with one person on a longer term loan, or transfers from person to person. It's all still invested at x%. There are some other factors to consider though. You cannot always assume you can reinvest immediately and there may be gaps between the short-term loans so long term loans average out better as there are less gaps. However longer term loans carry more risk in terms of your ability to exit if things look bad with the platform or the economy in general.
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Post by nesako on Jul 24, 2017 8:23:55 GMT
Just curious, looking purely at the mathematical side of loans, does loan term influences how much I profit (assuming all the loans have the same interest rate)? For longer loans you see that people pay a lot more in interest, but they barely pay any principal at the beginning. How do they compare to shorter loans that repay principal faster? Or does it even out over longer period of time? If you assume that your short term loan payments can always be reinvested straight away, it makes no difference even in the short term. It doesn't just even out over a longer period, it is always even each and every day. This is because it makes no difference if the principal stays with one person on a longer term loan, or transfers from person to person. It's all still invested at x%. There are some other factors to consider though. You cannot always assume you can reinvest immediately and there may be gaps between the short-term loans so long term loans average out better as there are less gaps. However longer term loans carry more risk in terms of your ability to exit if things look bad with the platform or the economy in general. This is correct assuming you do not re-invest interest, but if you did and assuming there are no gaps, then short term loans would gain you slightly more in the long term: 100 invested @ 12% for 1 year, will get you same rate, on the same 100 every single day for a year. 100 invested @ 12% for 1 month and re-invested for 1 year, means: 1st month you will get 1% @ 100, 2nd month you will get 1% @ 101, 3rd month you will get 1% @ 102.1 etc. I believe annualised this will come closer to 12.49% or whereabouts. However, getting something repaid and instantly re-invested is mega low chance... crazy number of loans get delayed / extended / bought back. Also if you get a longer term loan which is 13%, then you are better of getting the higher paying longer term loan. The downside is exiting it fast... you could by selling for a discount, but if there is something wrong with the company and SM is closed, you would be stuck...
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kulerucket
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Post by kulerucket on Jul 24, 2017 10:07:31 GMT
@nesako, I see your point and not sure if I agree. You assume that the short terms loans re-invests interest but the long term one does not.
In your example you forget the fact that after one month of the yearly example, you get some principal back to re-invest. So in the yearly example:
1st month you will get 1% @ 100,
2nd month you will get 1% @ ~90 + 1% @ ~(11), [depends on repayment plan]
3nd month you will get 1% @ ~80 + 1% @ ~(11+12.1)
EDIT: changed answer from somewhat agree to don't agree
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Post by nesako on Jul 24, 2017 10:22:27 GMT
@nesako, I see your point and agree. However in your example you forget the fact that after one month of the yearly example, you get some principal back to re-invest. So in the yearly example: 1st month you will get 1% @ 100, 2nd month you will get 1% @ ~90 + 1% @ ~(11), [depends on repayment plan] 3nd month you will get 1% @ ~80 + 1% @ ~(11+12.1) It's less than the monthly, but more than just 100 invested @ 12% for 1 year. Yeah, I did forget to factor in the amortisation bit for the longer loans. Well, I believe now this question has been covered in quite a detail!
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kulerucket
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Post by kulerucket on Jul 24, 2017 10:26:12 GMT
Sorry I was messing with my answer while you were answering. In any case I agree that the dead-money aspect is a much bigger factor these days and that longer term ones are better. This is also true when you consider that the rates are gradually dropping.
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fric
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Post by fric on Jul 24, 2017 12:24:10 GMT
So basically it all comes down to other factors (default rates, ability to reinvest, your strategy etc. etc.) and not just which is mathematically better. Thanks!
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Post by rahafoorum on Jul 27, 2017 13:41:16 GMT
This is correct assuming you do not re-invest interest, but if you did and assuming there are no gaps, then short term loans would gain you slightly more in the long term: 100 invested @ 12% for 1 year, will get you same rate, on the same 100 every single day for a year. 100 invested @ 12% for 1 month and re-invested for 1 year, means: 1st month you will get 1% @ 100, 2nd month you will get 1% @ 101, 3rd month you will get 1% @ 102.1 etc. I believe annualised this will come closer to 12.49% or whereabouts. However, getting something repaid and instantly re-invested is mega low chance... crazy number of loans get delayed / extended / bought back. Also if you get a longer term loan which is 13%, then you are better of getting the higher paying longer term loan. The downside is exiting it fast... you could by selling for a discount, but if there is something wrong with the company and SM is closed, you would be stuck... Since the interest rate is same for long- and short-term loans, the outcome will not be different from your example for the long-term loans as well. You get exactly the same amount of interest after month 1 for both and you can reinvest both. Although for long-term loans the amount you need to reinvest is smaller. In addition, for short-term loans you invest into a new loan after every month, meaning it could default at the same probability each month. For longer term loans however, the probability of default tends to drop somewhat after some months of proper payments. So one specific longer loan (after it has shown itself as performing well), could be less risky as well. Although in general, a random longer term loan would probably carry a higher probability of default and possibly (s)lower recovery rate, since those are usually larger loans than the 1-month short term loans. Of course, the latter is not taking into account that borrowers for 1-month and borrowers for 24-month loans are probably different segments and carry a different inherent risk as well  In short, there's no one single universal simple answer to your question probably.
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Post by nesako on Jul 27, 2017 13:44:28 GMT
And that is why I have split my money 50/50 between 1M short and long term loans - get the taste of the both worlds...
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kulerucket
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Post by kulerucket on Jul 27, 2017 13:55:39 GMT
And that is why I have split my money 50/50 between 1M short and long term loans - get the taste of the both worlds... I like to keep a spread going too: Long (>2y) - 25.19% Medium (3m-2y) - 46.30% Short (<3m) - 28.52% I'm working on reducing my long term loans. If possible I'd like to keep my maximum duration at about 2.5 years but I got a bit carried away with longer term 13%+ buyback loans from Mogo.
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