How Loans are Charged in Peer-to-peer lending
We are going to see how the loans in Peer-to-peer lending are charged, as the promoters requesting financing return, through the Peer-to-peer lending companies, all the capital that they have received in loans, plus the corresponding interest and commissions, to the investors and we will put simple examples so that everything is easily understood.
With the help of our colleagues from P2P and thanks to their simulator we will give some examples of repayment of loans for monthly reimbursement, quarterly reimbursement of capital and interest, repayment on maturity of capital and interest and, finally, reimbursement at maturity of capital, with monthly interest payment.
For this, we will assume that on March 16, 2015, an investor formalizes an investment of €1000 at an average interest rate of 7% and a repayment term of 12 months. Let’s see what the amortization table is for these four different cases of reimbursement:
1. Monthly reimbursement:
With this modality of reimbursement, which is known as the French system, the same monthly payment is returned every month, but the interest paid is higher at the beginning and then decreases as time goes by and the amortized capital goes backwards, at the beginning, less capital is amortized and at the end, each time, more capital is amortized as time passes.
Next we will put the amortization table for the example that we have indicated at the beginning:
Note that there is a column of tax withholdings of 20% for the returns of movable capital that affects the interests of the loan that investors charge and that there is a management fee (which in P2P is 0.85% on capital pending) plus another column to reflect the corresponding 21% VAT applicable to said administration fee.
This gives rise to 12 monthly installments of €86.53, which in total amount, after twelve months, is €1038.32, but since the investor will have received a total net amount of €1025.03, this means that their profit annual net, once discounted the administration fee (€4.65), VAT (€0.98) and tax withholdings (€7.66), will be €25.03 net.
2. Quarterly capital and interest reimbursement:
Here the reimbursement is made instead of each month, each quarter, both capital and interest and for the header example the amortization table would be like that of the following image:
The amortization system is the same as in the previous case, but quarterly, charging 4 equal installments of €261.03 gross that after deduction of tax withholdings (€8.83), the administration fee (€5.36) and VAT (€1.13) give a net amount of €1028.82, that is, the net profit of the investor will be €28.82 net, a little higher than with the monthly reimbursement.
3. Reimbursement upon maturity of capital and interest:
In this case, nothing is amortized during the 12 months until the final maturity of the term does not arrive, that is to say, at the end of the 12 months it pays a single installment that includes capital and interest and that in gross amount sum 1070.00 €that deducted tax withholdings (€14.00), administration fee (€8.50) and VAT (€1.79) this gives a net amount received by the investor of €1045.72, that is, in In this case, the investor earns a net profit of €45.72, which is much higher than in the two previous cases, as a result of the fact that there is no partial partial repayment until the final maturity.
And this would be the amortization table for the repayment upon maturity of capital and interest:
4. Reimbursement upon maturity of capital, with monthly interest payment:
Here, the difference with the case that precedes it, is that the capital is fully reimbursed at maturity, but interest is paid monthly, let’s see what the amortization table would look like in this case:
This means that 11 equal installments of interest of €5.83 are collected, giving a total gross amount of €70, which including the final amortization of the capital (€1000) gives a gross total collected of €1070.00 that subtracts the tax withholdings (€14.00) the administration fee (€8.50) and VAT (1.79) gives a total amount charged net of €1045.72, that is, the investor will have received a net profit of €45., €72 which is exactly the same as in the previous case since nothing is amortized until the end and that is why said capital generates exactly the same interest, although they are paid monthly, which benefits the investor since it has more cash for to be able to reinvest it in other investment projects or to spend it on what you decide.
Other types of loan repayment
There are many other types of repayments and types of amortization, as many as the mind gives itself, such as the system of amortization of increasing quotas, which consists of a progressive and geometric growth of the quotas, in which the quota is varying so much (growing ) as the interests (decreasing) as the loan repayment period or the amortization system of the decreasing installments or the fixed installment amortization system with variable repayment period goes by, in short, there are a lot of methods of financial amortization of loans but all have in common in that with each installment is returned a part of the principal of the debt (amortization of debt), which also pays some expenses (in the form of interest and commissions) by disposition of said capital and that these vary according to the amount of capital loaned, the repayment period and the amortization method chosen, but these four systems of The reimbursement that we have chosen are the ones most commonly used by the Peer-to-peer lending companies and they already collect all the information in this paragraph.