spiral
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Post by spiral on Jan 19, 2015 8:58:01 GMT
Does anyone know how a £10 on the monthly market would behave if persitently reinvested at say 3%?
Logic says it should provide 30p interest at the end of the term but as the monthly interest due is about 2.47p and only 2p can physically be added to the account, does the remaining 0.47p accrue such that next month 2.94p is due which can still only result in a 2p interest payment but on month 3, the accruals amount to 1.51p thereby enabling 3p interest to be paid?
Obviously for longer term markets this can be done because all of the repayments are coming from the same borrower so they can distribute the uneven paymens across the term of the loan and across different lenders whereas in the monthly market, you are likely to have 12 different borrowers so it would have to be accrued by RS in your account somehow.
If this doesn't occur and you only receive 2p each month, your 3.0% return is actually only 2.4% (no compounding possible on any of the monthly 2p's).
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sl75
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Post by sl75 on Jan 19, 2015 11:44:58 GMT
Feel free to research the matter (unless someone else already has, and is willing to share, or RS make a definitive statement on the matter)....
Possible answers include:
- RS are salami slicing, so you always get rounded down (with RS keeping the extra fractions of pennies from every loan contract made) (annual rate will always be below the level stated)
- RS round to the nearest penny, making up the shortfall and/or funding the deficit from adjustments in the actual level of fee they take (e.g. owed £0.024999, you get £0.02, and owed £0.025001 you get £0.03)
- The fractional pennies get pooled, and then divided out "randomly" - with your fraction of a penny representing the probability that you receive an extra penny (over time, annual rate will, on average, be exactly equal to the level stated).
- The fractional pennies get pooled, and then divided out amongst those who are owed the greatest fraction of a penny (thus people who are owed about £0.022 get £0.02, and people who are owed about £0.028 get £0.03). The dividing point for the resulting "rounding" function would not be exactly 0.5p, but whatever point results in all the pennies being given out.
- Fractional pennies really get credited to your account, but just aren't visible on a statement that only shows whole pennies - after several such repayments your total wouldn't balance with the transactions you see.
- Fraction pennies are held "behind the scenes" somewhere, and will be credited to you when you've earned a whole penny.
For several of these possible answers, it may be possible to arrange to lend a combination of amount and interest rate that consistently gets rounded UP to £0.03 rather than down to £0.02.
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spiral
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Post by spiral on Jan 19, 2015 17:40:59 GMT
- RS are salami slicing, so you always get rounded down (with RS keeping the extra fractions of pennies from every loan contract made) (annual rate will always be below the level stated) Zopa operate their accounts to 6 decimal places IIRC but I've never seen anyone talk about RS equivalent on these forums so I suspect the salami slicing is probably the right call. Banks do the same if you have a £ in an account paying 1.2% you only get a penny at the end of the year but would receive no interest at all if you'd opted for monthly interest option.
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sl75
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Post by sl75 on Jan 19, 2015 18:39:44 GMT
Zopa operate their accounts to 6 decimal places IIRC but I've never seen anyone talk about RS equivalent on these forums so I suspect the salami slicing is probably the right call. Banks do the same if you have a £ in an account paying 1.2% you only get a penny at the end of the year but would receive no interest at all if you'd opted for monthly interest option. I'm pretty sure that salami slicing is not the answer (at least not in its most obvious form), as contracts with "rounded up" interest do in fact exist. As an initial "experiment", I created a 1 month offer of £12 at a rate of 2.9% (matching an existing borrower offer). This generated a contract with a ("simple") interest rate of 2.94%. £12 * 2.94% / 12 = £0.0294 of interest based on a "monthly" interest rate, or £12 * 2.94% * (31 / 365) = £0.02996 of interest based on a "daily" interest rate. By either method of calculation the interest due is strictly less than £0.03, so a pure "salami-slicing" technique would keep £0.009xx for RS, and give me £0.02. In fact the payment schedule shows me receiving £0.03 of interest on 19 Feb, so at least some interest payments are in fact rounded up. Undoubtedly it would be possible experiment further with different amounts to test the different rounding possibilities. e.g. if about £0.0251 or £0.0249 of interest would theoretically be due does it in each case always round up, always round down, or round up or down depending on some other factors. If the mechanism permits it, a lender could potentially arrange things so that they always benefit from the rounding, and thus improve their return slightly (whether that's at the borrower's cost [paying more overall in repayments], RS's cost [getting less in fees], or the cost of other lenders [adjusting the threshold at which interest rounds up instead of down for a specific borrower's loan] would depend on further implementation details).
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spiral
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Post by spiral on Jan 20, 2015 10:46:13 GMT
Maybe then they do operate to several decimal places then and accrue the fractions. I'm not sure what markets you normally operate in and even if there would be cross over between markets but is it possible that you had already accrued a fraction of a penny in the monthly market. I've only ever lent in the 5yr markets so my interest in other markets is purely that although I am currently looking to recommend the monthly market to someone so started realising the questions that I would ask someone if in their shoes and then realised I didn't know the answers.  |
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