I see you've added highlighting, but you are still wrong - read the last line of my previous reply. I'll do the calculation for you later...
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Hay, i have to suck eggs everybody.
I made a mistake with the previous example. I didnt use the xirr function correctly over the payments as they coming in.
The answer maybe closer to 6% over the period. Ie i did it at the end instead as they actually happened which is wrong.
Oh well live and learn - i will go back to my cave now. I may still be wrong but maybe more closer.
Attachment 9037
Nah, what you originally showed is what a few here have shown they think is the way to calculate returns. The key is that when that principal starts coming back it's no longer part of the investment. You don't need XIRR to calculate this example - percentages do subtract in this case. Full set of numbers in the image below, which might help clarify it for others - bold column shows how much of the original $10,000 is still invested over the course of the loan:
Attachment 9038
In your example what does period rate mean ?
ie which columns give you that number ?
And what is the return over the 5 years ? on that single loan - no reinvestments.
Do you agree with this statement - if we lend somebody 10k at 6.99 for 5 years on one loan - we get back 10k (capital) plus $1596.22 (interest once harmony had their slice) ?
I do understand that the interest 1596.22 is over the lifespan of the loan ie divided by the time slices of the loan.
Cheers and Thanks
(texting from the cave)
The interest rate returned for the period (1 month) as an annual rate (so it can be compared to other annual rates).
Calculated as follows:
Interest less Fee Returned / Invested * 12
e.g For the 1st period: 49.51 / 10000 * 12 (multiplying by 12 as the period is only for one month, this makes it an annual rate so comparable to the 6.99% pa)
The rate of return is 5.94% pa on the amount invested across the loan period (this is not $10,000 for the whole loan - it is reducing as shown in previous attachment).
Yes and no. Yes in that we get those amounts back spread across the loan period as per my previous attachment. No in that we lend them $10,000 at the start, but at year 1 we are only lending them $8,268.65 as they have repaid us $1,731.35 (plus interest) - so we are not lending them $10,000 for 5 years.
Thank you very much.
I understand your comment in regards to how the capital (and interest) is released throughout the
duration of the loan.
In my minds eye i was describing a situation where you had a bank account with a balance at the start and at
the end you collected on the balance (5 years later) - with no reinvestment over the time period ie just a bank
account with no interaction - i dont think i articulated that very well.
Can you expand on your thoughts on why the xirr function is not good here ?
Thanks again, much appreciated .
Cheers
Unfortunately this is a misconception that some fall into - I think Harmoney make it clear that investing with them is not like a bank account. Hopefully that's more obvious now. If you leave returned money in funds available, you might as well put it under your mattress for extra insulation...or draw it out and put it in the bank and at least earn 3.5%...
Def: "XIRR is used to calculate the internal rate of return or annualised yield for a schedule of cash flows occurring at irregular intervals."
Your example of a single loan with known periods and regular cash flows doesn't need XIRR to calculate the return, so actual values are better. However, for the typical investment in Harmoney, with many loans, irregular intervals, payments and withdrawals, XIRR is perfect, and probably one of the only, relatively easy methods available for calculating returns. This is what most appear to use for tracking P2P lending.
To use XIRR with Harmoney, you only need to track; deposits, withdrawals, funds available and outstanding principle. This will give you a return of your total investment over time (no need to track; tax, fees or defaults, as they are 'built in').