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Flender compounding

  • 16-01-2019 3:25pm
    Registered Users Posts: 1,583 ✭✭✭

    Maybe I'm going crazy but I can't quite understand how Flender are calculating their returns. No matter what I do I just can't seem to calculate a return of 10.3% which I presume they mean a return of €1000*0.103 = €1030 per annum (€3090 total).

    According to the FAQ:
    The percentage that we show as potential return is the annual interest rate that is charged on a decreasing balance loan.
    For example if you lend a Borrower €10,000 at a 10.30% interest rate over 36 months, the monthly repayments to you will be €324.08.
    So you will get back €11,666.96 in total (i.e. a return of €1,666.96, or 16.7% of the loaned amount). Dividing that 16.7% by three years gets to 5.7%, but that 5.7% is not the available rate of return, because it's not compounded.
    In order to achieve an annual rate of return of 10.3%, you'd simply reinvest the monthly repayments from this loan into other loans to receive the benefits of compound interest.

    In an idealised scenario which perfect reinvestment, no waiting, fees etc. the interest earned on the first 10000 loan is €1666.96 as described in the FAQ.

    In Month 1, and every subsequent month, we receive a repayment of €324.08 which we reinvest in an identical 36 month loan at 10.3% compounding monthly. Over 36 months, we will have 35 such reinvestment opportunities. The cumulative interest for each of these 35 loans can be calculated in Excel as follows:

    Reloan 1: =CUMIPMT(0.103/12,36,324.08,1,35,0)
    Reloan 2: =CUMIPMT(0.103/12,36,324.08,1,34,0)
    Reloan 3: =CUMIPMT(0.103/12,36,324.08,1,33,0)
    ....and so on

    The start period for the calculation is always 1 while the end period changes depending on how many months are left in our 36 month investment window when each €324.08 is reinvested.

    (Similarly, when out €324.08 is reinvested, we receive a repayment of €10.5 (starting at the end of Month 2) which we reinvest and calculate interest as above. The €10.5 is re-loaned for a repayment of €0.34 and so on and so on. After about 0.34 the interest becomes negligible.)

    Working in this manner the total interest calculated over 36 months seems to be €2950 rather than €3090 which works out at about 9.8%

    Can anyone explain this or am I missing something major?