The projected return is an estimate of the annual return, after fees and bad debts, that a diversified investor could earn.
To calculate it we take the following for the distribution of loans, across both risk band and loan term, that we expect to be funded on the platform.
Gross interest rate
This is the gross interest rate that businesses pay to investors for the money they borrow over an annual period.
Estimated annualised bad debt rate
This is the percentage of loans that on average will not be paid back in the future, on an annualised basis. It is the percentage of loans that are lost net of the amount that is recovered.
Funding Circle 1% servicing fee
The 1% servicing fee is deducted from monthly loan repayments when, and only when, they are received.
We then use the formula below to calculate the current estimated return. The formula takes a weighted average of the estimated return for each risk band after fees and bad debts, assuming monthly re-investment of repayments at the same gross interest rate. The average return is weighted by loan amount, compounded and before tax.
Worked example for a single B risk grade loan
Gross interest rate: 10.5%
Estimated annualised bad debt rate: 2.3%
Servicing fee: 1%
Current estimated return for this B risk grade loan = 7.4%
Limitations to this estimate
This return is a future estimate of the return after fees and bad debts for the distribution of loans, across both risk band and loan term, that we expect to be funded on the marketplace. We think it is the most useful and accurate way to assess future investment performance because it takes into account both our fees and any future bad debts but as with many calculations it has some limitations, including:
- The calculation is based off estimated bad debt rates and actual bad debt rates may differ. Historical information on actual bad debts can be found on the statistics page.
- Gross interest rates may change in the future which may impact your return
- It compounds interest and therefore assumes re-investment
- It is before tax: different investors have different tax rates some earnings are taxed differently. Read more.
- It does not include any amounts not lent to businesses
- Past returns are not necessarily a guide to future returns