Avoid common mistakes
The profitability of your portfolio is undoubtedly one of your concerns. But it is often difficult to express this notion in a simple way.
Common mistakes include confusing the nominal interest rate and the rate of return or expressing the yield as the return of your global investment, but these methods are both incorrect:
- in the first case, you compare different things: the annual rate of return of a loan is not equal to the annual interest rate since the borrower repays each month a part of the principal and a part of the interests;
- in the second case, the method is incomplete because the profitability you obtain does not take into account the potential reinvestment of the profits and is not an annual rate, which means you cannot compare it with that of other financial products.
Internal Rate of Return (IRR)
When we talk about yield on October we refer to the Internal Rate of Return, a common notion in the investment sector, which allows comparing several types of investment.
The IRR takes into account all the cash flows (initial investment, monthly repayments, defaults) and expresses them in an annual return.
The IRR applies not only to a loan, but also to the Portfolio (which is the most useful one for lenders), taking into account defaults or late payments.
Let's take an example: imagine that you invested €100 over 24 months and that at the end of this period you get €106.81. The IRR estimates the annual rate that should be applied to the initial investment of 100€ to obtain 106.81€ with monthly reimbursements, after two years. To do so, we have to take into account all future repayments, the date of these repayments and the date on which the initial investment was made. In our example, the IRR in this case is 6.61%. Read more about the IRR
You can find this global IRR on the Summary tab of your Portfolio. Every time you lend to a new project, this IRR is updated. It is important to note that the IRR is divided between IRR before defaults and IRR after defaults. This allows you to quickly see the impact of defaults or delayed projects on the profitability of your Portfolio.