pikestaff
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Post by pikestaff on Dec 4, 2013 9:41:27 GMT
When comparing interest rates between different platforms it is important to understand how rates are quoted, so that you are comparing apples with apples.
I have only just learned (from this platform) how FC interest works, which is that 1/12 of the stated interest rate (before fees) is applied each month. To take the minimum rate on a C- loan as an example:
Stated rate 11.5%
Net of fees 10.5%
AER after fees, approx (1+.105/12)^12-1 = 11.02%
By way of comparison, I know that TC's stated rate compounds daily on 30/360 day basis, which is very close to a true APR.
This means of course that 6 months interest on a 12 month interest-only loan at 10% (to take a simple example) is not 5% but (1+.1)^(1/2)-1 = 4.88%
Not sure about the other platforms. If anyone knows this stuff, it would be useful to put a table together.
Edit: I was wrong about TC. See my post of 11/3 below. (Done as new post so that it is noticed.)
Edit 2: (17/4) I think RS rates are true AERs.
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Post by chris on Dec 4, 2013 9:57:46 GMT
At Assetz we use a simpler calculation for interest which isn't compounded. So we take the annualised rate, divide it by 12 and use that as a monthly rate charged on the remaining principal. Accrued interest is then calculated as a simple percentage of the way through the current billing period (so if you are on day 14 of a 30 day month then the accrued interest is 14/30ths of the interest due that month). Our loans do have much more flexibility in their structure though with interest only periods, payment free periods, different amortization terms, etc. We also don't charge the lender any fees (except a 0.35% transaction fee on the aftermarket).
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pikestaff
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Post by pikestaff on Dec 4, 2013 16:21:04 GMT
Thanks Chris. Sounds essentially the same as FC, but without the fee.
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pikestaff
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Post by pikestaff on Mar 11, 2014 8:46:52 GMT
I must correct my previous post re TC. I was right that interest compounds daily on a 30/360 day basis. But, it appears that the daily rate so compunded is 1/360 of the stated annual rate. Example:
Stated rate 10.5%
Daily rate 10.5%/360
AER (1+.105/360)^360 - 1 = 11.07%
which is actually very slightly better than the equivalent on FC.
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j
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Penguins are very misunderstood!
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Post by j on Mar 11, 2014 21:43:26 GMT
I must correct my previous post re TC. I was right that interest compounds daily on a 30/360 day basis. But, it appears that the daily rate so compunded is 1/360 of the stated annual rate. Example: Stated rate 10.5% Daily rate 10.5%/360 APR (1+.105/360)^360 - 1 = 11.07% which is actually very slightly better than the equivalent on FC. Why would the daily rate work out as 1/360?! There are 365 days in a year & obviously 366 if leap year! 
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pikestaff
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Post by pikestaff on Mar 12, 2014 10:54:07 GMT
It is a convention used in some bond markets, whereby the year is treated as 12 equal months of 30 days. I think it is a relic of pre-computer days. No idea why TC chose to use it. If you are interested in the topic, see for example here: wiki.treasurers.org/wiki/Day_count_conventions |
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james
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Post by james on Mar 13, 2014 9:28:19 GMT
Something to watch out for here is advertising, including the web sites, where rates are compared to savings accounts that use AER. If the rate quoted is not AER but inflates what it would be under AER rules, that would breach the FCA's "fair, true and not misleading" requirement and be a misleading financial promotion. At least, I see no other way to view it than as such a breach. Penalties for such breaches tend to be returning the money or paying the difference.
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pikestaff
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Post by pikestaff on Apr 17, 2014 10:37:17 GMT
James, any sites giving a flat rate are understating the rate compared to AER. The FCA may not find that quite so objectionable.
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Post by mrclondon on Apr 17, 2014 13:17:13 GMT
James, any sites giving a flat rate are understating the rate compared to AER. The FCA may not find that quite so objectionable. Only true if the interest payments are more frequently than annual (e.g. monthly / quarterly etc ). Where the interest payment is rolled up and paid on maturity betond a year, the flat rate overstates the rate compared to AER. This was the trap Wellesley & Co fell into when they first launched ... 7.5% flat rate paid on maturity is just 6.58% AER.
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Post by easteregg on Apr 18, 2014 6:30:14 GMT
The P2P money website will calculate the AER from the quoted rates. With sites using different methods for the interest rates it is very difficult for new and existing lenders to compare.
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