Each month you receive part of your capital and your interests. When you receive your repayments, you have a choice to make : you can both withdraw your money by bank transfer without any fee or you can reinvest it.
Reinvesting repayments maximizes returns. This happens because reinvesting means make your capital working more than once. As for bank loans, interests are calculated on the outstanding capital only. Since the outstanding decreases every month as long as the company repays its debt, the total amount on which interests are calculated decreases as well. Thus, if you reinvest your repayments each month, you will increase the capital taken into account to calculate interests.
Here's a numerical explanation. Imagine you lend €100 over 48 months at 7%
- if you do not reinvest your repayments, you will receive, after 48 months, 14% of interests.
- if you constantly reinvest your repayments (let’s say to projects with a 7% return) so that you keep your outstanding capital at €100, your return will be 28%: