The capital you lend to a company is remunerated with the payment of monthly interests.
If you do a simple math calculation of (interest rate x capital) you will not get the same amount of interests as the one displayed on both the project page and the repayment schedule of the loan contract. Why so? Because you have to take into account the repayment scheme to apply the interest rate applied to a loan is calculated a bit differently. Find out how in this tutorial.
Interest calculation and monthly repayments
October offers diverse types of loans, with different repayment schemes, affecting the calculation of the interest:
- Most of the projects on our platform are amortised loans. With this repayment scheme, loans are repaid through annuities, which means that the borrower repays the same amount every month, for the duration of the loan. Part of the annuity is interest, the other part is capital. The part of the interest paid decreases over time, because the borrower repays the capital over which interest is paid. Borrowers are not going to pay interests on capital already reimbursed
- Some of these loans includes a grace period, which means that during this specific period of time, the borrower only repays the interest. After the grace period, the borrower repays the principal and the interest on a monthly basis.
- Moreover, we sometimes offer bullet loans. In this case, all the principal is repaid at the end of the loan period and the borrower pays the interest every month.
- Finally, we have developed a new type of loan: the extended loan. It offers the borrower a grace period of 12 months, during which only the interest is paid to lenders, followed by several options of amortisations over the remaining period of the loan.
For all of these loans, the interest is calculated by applying an annual interest rate, determined by October Credit Committee and presented beforehand to lenders, to the outstanding capital (lent capital - repaid capital). Depending on the repayment scheme chosen, the amount of outstanding capital will vary, which will impact the amount of interest repaid to lenders.
Let us take an example. Imagine you lend 100€ to a project over 24 months at 6%. Hereunder, you will find 4 repayment schedules with these characteristics for:
- An amortised loan (interest received: € 6.28)
- An amortised loan with a 3-month grace period (interest received: € 6.99)
- A bullet loan (interest received: € 11.84)
- An extended loan (interest received: € 9.55)
Why such a difference? In the case of an amortised loan, the capital is repaid faster than for a loan with a grace period or a bullet loan. Therefore, the interest rate is applied on a lower amount of money and the interest paid decreases every month.
Internal rate of return calculation
The internal rate of return (IRR) measures the profitability of an investment.
The sum of interest you receive from the different projects have a direct impact on the calculation of the IRR. The IRR takes into the dates of all your investments, the monthly repayments and the potential defaults and express all these cash flows as an annual return. Your IRR is displayed on the Summary tab of your portfolio. If you want to calculate your initial IRR, you will have to:
- Download the Excel with all your repayments available on the Summary tab (click on the “Export” button above the Activity section),
- Add the date and the amount lent to each project
- Apply the XIRR formula (find out how to use this formula).
The current IRR is adjusted with defaults and early repayments. Therefore, it is a bit more tricky to calculate. If you would like to calculate it, you can get in touch with our Lenders team through the chat or at [email protected]