Annualized returns are calculated using an IRR (Internal Rate of Return) formula. IRR is the rate earned on every dollar actively invested and does not include uninvested cash. Returns are calculated net of fees, promotional credits and late fees.
IRR measures cashflows and assumes every note purchase is an outflow and every payment received is an inflow. Loans in good standing and in the grace period are assumed to be fully repaid as of the calculation date with accrued interest for the current period. Loans in delinquent states are still assumed to be repaid in full based on the principal value of the loan after the last successful payment. Charged-off loans are assumed to have no future payments, but any recovered amounts will increase future returns, all else equal. Withdrawn or cancelled loans have no impact on the calculation, but repaid loans are fully accounted for.
The IRR calculation can be completed in Excel using the =XIRR() formula. Essentially, IRR is an interest rate that makes the net present value (NPV) of all cash flows equal to 0.
To better understand the formula and how goPeer calculates the returns in given scenarios, you can review the following examples and test out the formula yourself in Excel:
For a loan in good standing or in the grace period, your purchase amount is counted as an outflow on the date the loan activates and is disbursed. Any payments that you receive count as cash inflows and on the calculation date, the remaining principal and accrued interest for the period is recorded as an inflow. For example, you invest $100 (-100) in a note on March 1, 2021 and receive a payment of $3 (+3) on April 1, 2021. The principal outstanding as of your calculation date on April 15, 2021 is $98 (+98). Using the XIRR formula in excel, you should be able to calculate the IRR as 8.5%.
Now if you assume the loan is instead charged off on April 15, the final value is 0. For the purposes of this calculation, using 0.00001 in excel instead of absolute 0 is best as otherwise it will return an error. Because the loss happened so quickly and was so large, the IRR drops to -99.9%.
For the calculation of a delinquent but not yet charged off loan using the same example, you could assume the calculation date is now as of January 1, 2022. The return now drops to 1.2% and continues to approach zero the longer it remains delinquent.
The impact of charge-offs and delinquencies may evolve over time. For charge-offs, no recoveries are initially included the IRR calculation. Recoveries will be added to your returns as they are effectively received. A delinquent loan that reverts to good standing will positively impact your returns. Inversely, a delinquent loan that gets charged-off will negatively impact your returns.
Uninvested cash is not included in the IRR calculation. We recommend using Auto-Invest to ensure all funds get reinvested promptly and continue generating compounded returns over time.
The calculated return and the data portrayed above is for informational purposes only and is not a forward-looking projection of performance. This data should not be relied upon to make investment decisions and is not a recommendation to purchase or trade securities. goPeer has taken reasonable care to ensure the accuracy of the calculation but it has not been verified or reviewed by an independent third party.