A number of our lending community have been asking how this works, so we thought we would provide a quick guide for you.
Let us say that a promoted loan on the resale market carries a coupon of 9.5%.
That will not be the interest rate that a lender would earn because the loan already exists, and so has accrued some interest (we call it purchased interest) which any buyer also has to pay for – i.e. the interest that has rolled up since the loan was originally made.
The amount of the lender's money that goes to buy the accrued or purchased interest, will not earn “interest on the interest”.
For £100 lent, say £5 was purchased interest and £95 was lent as principal. £95 would attract interest at 9.5%pa, but the £5 would attract no interest. So, the blended interest rate would be:
£95*9.5%pa = 9.025%pa
The implied rate is calculated daily and update on the resale market place. This is shown as ‘interest rate’ on the resale market
The lender fee payable equates to 0.75%pa on money lent, so on the above example the lender fee would be:
£95*0.75%pa = £0.7125
For every £100 the lender invests, a component of it would earn zero, whereas the coupon rate is 9.5%, these are then combined to deliver a weighted average.
We hope this helps!