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Post by gmaxkenny on Feb 17, 2017 23:10:01 GMT
This topic arose on the Grupeer Thread Official Note but turned into a discussion about loan extensions on Twino so I started this thread to see what other Twino investors thought. Basically I believe that loan extensions affect our profits as we are only getting back interest but not capital for up to six months so we have less to reinvest therefore we are making less money. Both Roedvin and Kulerucket disagree and say that it makes no difference. At the moment I have 33% of my capital tied up in extensions and while I get interest each month to reinvest I am not getting capital repayments to reinvest so I am losing out.
Example If I invest in a loan for 24 months and get repaid at the end of each month €1 principal and 10c interest I have €1.10 to reinvest. If the loan is extended I only get the 10c each month to reinvest and have to wait for the end of the extension or buyback to get a principal repayment. Surely this delay means I am worse off as not been able to compound the principal repayments monthly means I make less money.
Am I right or am I missing something?
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kulerucket
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Post by kulerucket on Feb 18, 2017 1:14:32 GMT
Forgetting about the 0.10€ interest you get back either way, the difference in your example is where the 1€ principal goes. It either resides in the original loan and continues to earn interest there or transfers to a new loan earning interest there instead. Assuming the rates are the same you still have the full 1.10€ invested at the same interest, it's just distributed differently.
Look at it another way. You have say 1000€ invested across whatever loans. All of it is earning full interest wherever it is. As you reinvest the interest, it's all still earning interest regardless of which loans it's in, Current, Delayed or Extended. The only way you would lose out is if extended loans did not pay interest, but they do at exactly the same daily rate as current loans. I.e. loan_amount*interest_rate/365 per day.
Maybe you are the one I'm picking up all of these 13% extended loans from ;-).
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Post by southseacompany on Feb 18, 2017 1:36:36 GMT
Kulerucket and roedvin are correct. The key to compound interest is when you get to redeploy the interest. Capital tied up to a, say, 13% loan of any duration is earning the same return, so in principle the only time you want loans to get repaid is just before you plan to withdraw funds. Otherwise a perpetual loan that is never repaid would yield the same return as a set of constantly rolling short loans.
Consider some numbers. A 13% loan earns 1.083% interest per month. If you reinvest the interest monthly, that compounds to a total of 13.803% per annum (and this is the actual return you should use when comparing p2p to other investments). Let's say every loan gets delayed by a month, so you get the payments due to you every 2 months on average. Then you earn 2 * 1.083% = 2.167% per two months, but compounding that only amounts to 13.725% per annum. The ~0.08% worst case difference is the maximum cost of delays you can lose out on Twino, since the maximum delay there is a month. Since you get paid the interest on extension, an extended loan does not affect these numbers at all.
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JamesFrance
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Port Grimaud 1974
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Post by JamesFrance on Feb 18, 2017 8:22:19 GMT
If the extended loan is at a lower interest rate than a loan with a longer term then you are losing compared to investing in the longer loans.
The loss of interest while waiting to reinvest repayments has the worst effect on your return, so as I have seen no new loans for a week I am now withdrawing a large amount, although the time lag for that makes it even worse.
For one month loans to earn the full interest requires immediate reinvestment when they are repaid, so in the current situation you are better off if they are extended.
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Post by gmaxkenny on Feb 18, 2017 11:17:25 GMT
Ok I get it now,I usually invest in the longer term loans when available but I am still looking for more secure returns than personal loans so I will be cutting back on Twino in any case.
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kulerucket
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Post by kulerucket on Feb 18, 2017 14:00:40 GMT
I am more comfortable with personal loans that business loans. People tend to own stuff, but a lot of businesses rent everything. IMO it is a much bigger deal to declare yourself bankrupt than your business. For a business you can effectively just start another one and carry on unless you are demonstrably incompetent. It's a lot harder for a bankrupt person to build themselves back up. I believe that most people would do everything they can to avoid bankruptcy, but a business would not fight as hard.
@southsea: Twino compounds daily, you just get the total at the end of the month so it would also not make any difference if it were 2 months under the same rules. You'd get the same. I've tested this against many different permutations of loan lengths and can predict the interest to 3 decimal places even if the loans is 30 days, or anything lower like 7 days (e.g. from buying delayed ones closer to the payout).
That is the total is: "loan_amount*interest_rate/365*number_days" and not "loan_amount*interest_rate/12"
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Post by southseacompany on Feb 18, 2017 16:43:56 GMT
kulerucket: You are right that the interest is computed daily. Regarding the rest we may have to agree to disagree. What you describe is daily computation, not daily compounding. While the total amount paid is the same whether for a 2 month period or two 1 month periods, money has time value. If you get access to part of the interest earlier, you are better off, even when the total amount is the same. This is manifested in the maximal 0.08% difference of compound returns I mentioned earlier.
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kulerucket
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Post by kulerucket on Feb 18, 2017 16:58:11 GMT
I see what you mean and get it now. You don't get the interest on the interest earned until you actually get the money back.
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