stevio
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Post by stevio on Feb 5, 2017 23:21:06 GMT
I'm trying to get me head around the offers on SM
If all loans were equal interest, say 12%, it would be easy - 101% offer on one loan would be the same as another
But there are varying interest rates 10-16%
There is also varying terms
Also, some are amortizing
So, say I had 12% loans elsewhere - if I was to sell those at par and use the proceeds to do the following, how do I work out if that is worth it or not:
a) Pay 101% for a 16%
b) Pay 99% for a 10%
In a similar vain, if I wanted to use the proceeds from an Ablrate sale to invest in a 12% loan elsewhere, how do I work out the % I need to offer it at to make a profit:
a) 16% loan
b) 10% loan
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Post by ablrateandy on Feb 5, 2017 23:38:39 GMT
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.
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james
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Post by james on Feb 6, 2017 2:11:09 GMT
Look at the AER as ablrateandy wrote, and ignore the mark up or down. For an example compare interest only loan 100047 online business ending in late 2017 where 101.1% is yielding 10.767% with say 100037 basket of loans ending in May 2019 where 101% is 12.1% and 102% is 11.56%. Amortising loans in effect work by shortening the effective term, same effect. It wasn't for nothing that early on I wrote that the secondary market list needed to show AER, not markup, as you asked recently. Though both would be handy sometimes.
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Post by oldnick on Feb 6, 2017 7:06:29 GMT
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.
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Post by GSV3MIaC on Feb 6, 2017 7:49:45 GMT
And don't forget the risk of early repayment. That can change the numbers dramatically if it happens, and makes buying at a premium bad, and at a discount good.
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blender
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Post by blender on Feb 6, 2017 8:57:55 GMT
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.)
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stevio
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Post by stevio on Feb 6, 2017 9:42:33 GMT
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. Thanks If APR is the most important figure, rather than premium/discount then should it not be on the front page of the SM? As james mentioned, is it then possibly for ablrate to have a APR column for the premium/discount of the 'Best Bid' and 'Best Offer' columns (you are pulling and displaying the data for the % discount/premium, so it should be simple to pull the APR alongside it). This would then save going into each loan to see APR's available. Also, could all these columns be sortable? (the others are) As ablrateandy alluded to, the SM is a little complex, the above changes should help your investors locate the best deals (using whatever criteria they feel pertinent) and hence make the SM more 'user friendly'.
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stevio
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Post by stevio on Feb 6, 2017 9:48:25 GMT
Look at the AER as ablrateandy wrote, and ignore the mark up or down. For an example compare interest only loan 100047 online business ending in late 2017 where 101.1% is yielding 10.767% with say 100037 basket of loans ending in May 2019 where 101% is 12.1% and 102% is 11.56%. Amortising loans in effect work by shortening the effective term, same effect. It wasn't for nothing that early on I wrote that the secondary market list needed to show AER, not markup, as you asked recently. Though both would be handy sometimes. 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?)
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n
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Yet another Nick
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Post by n on Feb 6, 2017 10:07:41 GMT
This is why I hate non-par SMs
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SteveT
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Post by SteveT on Feb 6, 2017 10:37:05 GMT
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.
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treeman
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Post by treeman on Feb 6, 2017 10:47:35 GMT
Important to note that the AER isn't what you actually get - it's purely a comparator. It assumes compounding (re-investing at same rate with zero cash drag) of your monthly (or periodic) returns over a 12 month period. eg 12% (non-amortising) rate will return £12 on a £100 over a year (not the 12.68% AER) if left alone. Perhaps that's part of what confuses some people ?
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james
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Post by james on Feb 6, 2017 13:38:39 GMT
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?) 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.
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stevio
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Post by stevio on Feb 6, 2017 13:51:44 GMT
Important to note that the AER isn't what you actually get - it's purely a comparator. It assumes compounding (re-investing at same rate with zero cash drag) of your monthly (or periodic) returns over a 12 month period. eg 12% (non-amortising) rate will return £12 on a £100 over a year (not the 12.68% AER) if left alone. Perhaps that's part of what confuses some people ? ablrateandy example was 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% returnSo I am guessing 12.683% includes compounding interest over THREE years? Why is the return at the start of the final year less than the interest rate of 12% you would receive for that year?
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james
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Post by james on Feb 6, 2017 13:58:45 GMT
This is why I hate non-par SMs 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.
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james
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Post by james on Feb 6, 2017 14:00:59 GMT
And don't forget the risk of early repayment. That can change the numbers dramatically if it happens, and makes buying at a premium bad, and at a discount good. It would, if the loan contracts allow it. The standard ones don't, without Ablrate negotiating the terms. These aren't Consumer Credit Act deals where there is a legal right to repay early at almost no cost.
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