A New Net Return Formula That Works Harder For You

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Audrey White
20th April 2016

We’ve established a new, simple formula to calculate your annualised net returns. This new formula will provide a more accurate understanding of your returns while better accounting for elements of the loan repayment process that we can’t perfectly predict.

To calculate the annualised net return, we consider the return generated from the capital employed for each period. A period is defined as the number of days that pass in which the capital employed remains constant. The calculation of capital employed is taken from the sum of deposits less withdrawals. (i.e. funds added minus funds withdrawn) on a cumulative basis.

How will it work?

We aggregate NetGains as follows:

We then annualise the rate of return for each period in the series:

The more frequently you withdraw credit from the platform, the more periods you will have in your series. This addition to the formula improves the accuracy of how we track the capital employed. We also take a weighted average of the annualised rate of returns against the number of days so that longer periods of consistency weigh heavier in the formula than single days of unusually high losses or gains.

Why the change?

This new method has several advantages over the previous formula:

  • It is based on historic data
  • Defaults are discounted according to their probable loss
  • Idle (unemployed) capital on the platform contributes to a lower yield
  • The benefit of compounded returns is included

Until recently we had been using a simple formula to calculate an indicative net return shown on the lender dashboard. But, the new calculation is more accurate and therefore will be more useful to you!

For example, the new method better accounts for all your money invested by accounting for employed capital and not just live investments. And, the old method failed to account for the probable recovery of defaulted loans, which created a less positive summary than was realistic.

Many lenders have had an improved site experience since we began sharing the “Probable Recovery” analysis. However, we also hear your questions about why the ability to recover debt isn’t closer to 100 percent, for example when a loan has a second charge. While it is true that stronger security does improve the likelihood of recoverability, we rely on the expertise of our legal recoveries team to make informed adjustments to the probability. We would rather state a prudent recovery probability and adjust upwards as recovery is successful throughout the process.

Defaults become a bad debt only after bankruptcy proceedings or at the discretion of the recovery team. Bad debts represent a loss, but other types of defaults do not necessarily mean a loss.

What’s next for me?

It’s difficult to give a perfect net return calculation, but this updated method gives you a more accurate net return of capital employed with the platform.

In the future, as a further improvement to the lender dashboard, we plan to add 3 tabs that will allow you to filter your dashboard stats to see “All Time Stats” (as current), “Rolling 12 Months” and “Current Tax Year.” We will keep you posted about when this feature will be available!

On request, we can give you your aggregated return data for each period, for you to perform you own analysis, please allow us 2-3 weeks from request to prepare this for you.

Please direct any questions or suggestions to the customer support team at: support@rebuildingsociety.com

Feature image courtesy of Steve Jurvetson, Creative Commons

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