Are you confused by the different interest rates provided in the loansheet? Which figure should you follow? Do you need to pay attention to the processing fee and commissions? These are the questions I will tackle today. But first, a warning – interest rate can be a confusing topic, especially for those without a background in finance. I’ll try to keep things simple and use plenty of examples.
Borrower’s interest rate versus Investor’s interest rate
The borrower’s interest rate may be different than the investor’s interest rate because some platform may charge certain fees on the monthly cash-flows.
Borrower’s interest rate refers to the interest rate paid by the borrower.
Investor’s interest rate refers to the interest rate earned by an investor.
Simple interest rate versus effective interest rate
Simple and effective interest rates are different ways of calculating interest and repayment. Funding Societies prefer to use simple interest rate, while MoolahSense and Capital Match use effective interest rate.
Simple interest rate computes interest payments based on the initial amount lent out (called the principal).
Effective interest rate computes interest payments based on the outstanding principal and the end of each term.
For further information on interest rates, please refers to MAS’ MoneySense page on borrowing costs.
For investors, my suggestion is to look for investor’s net effective interest rate. This is a net figure, meaning that all the platform fees (processing fees, commissions) have already been deducted. All platforms report this figure, although they use different terminologies.
|MoolahSense||Capital Match||Funding Societies|
|Simple Interest Rate||Not disclosed||Annual effective yield||Loan Simple Interest Rate|
|Effective Interest Rate||Effective interest rate||Annual percentage rate||Effective Interest Rate|
MoolahSense Example: MKM
(A) Effective interest, earned by the investor = 18% (no other fees are charged)
(E) Monthly interest rate = 1.5%. Annualized effective interest = 1.5% x 12 = 18%
Capital Match Example: Loan #58
(A) Interest rate on the loan, paid by the borrower.
(B) Monthly processing fee on the loan, paid by the borrower.
(C) Net effective interest rate, earned by the investor. Computation method is similar to MoolahSense’s example.
(D) Net simple interest rate, earned by the investor = 35,688 / 300,000 = 11.9%
Funding Societies Example: Loan SB-1602016
(A) Simple interest rate, paid by the borrower.
(B) Effective interest rate, paid by the borrower.
(C) Net simple interest rate, earned by the investor.
(D) Net effective interest rate, earned by the investor.
(E) Principal Repayment (per month) = $200,000 / 12 = $16,666.67
(F) Interest Repayment (per month) = $200,000 x 13% / 12 mths = $2,166.67
(F) Service fee (per month), paid by investor = ($16,666.67 + $ 2,166.67) x 1% = $188.33
(H) Monthly repayment received by investors (net of all fees) = $16,666.77 + $2,166.67 – $188.33 = $18,645.00
What if you are still confused?
Ok, I don’t blame you. Interest rate is a confusing topic. Part of this is because bankers and financiers want it to be confusing so that others wouldn’t know how much they are really earning.
Actually, there is only one important point here: as an investor, you want to compare the investor’s net effective return across different loans and platforms. This is the return you will earn as an investor on each dollar invested, net of all fees. This figure is shown in the red box in the above examples from MoolahSense, Capital Match and Funding Societies.