Updated annual return after fees and bad debt

To calculate it we take the following for the loans accepted in the year:

Gross interest rate

This is the gross interest rate that businesses pay to investors for the money they borrow over an annual period. For a year’s originations, we take the average interest amount received per month, divided by the average outstanding loan balance per month.

Annual bad debt rate

This is the percentage of loans that on average will not be paid back in a year, net of recoveries. This is calculated by taking the actual bad debt rate for each year of origination, and incorporating the estimated bad debt rates for years that have not fully matured.

Funding Circle 1% servicing fee

The 1% servicing fee is deducted from monthly loan repayments when, and only when, they are received.

Formula

We then use the formula below to calculate the return. The formula takes a simple average of the estimated return after fees and bad debts, assuming re-investment of repayments at the same gross interest rate, for all loans accepted within the year.

Formula for calculating Updated Annual Return

Limitations to this return

This return is the updated annual return after fees and bad debts for loans accepted in a particular year. As with many calculations it has some limitations, including:

  • The calculation is partially based off estimated bad debt rates and actual bad debt rates may differ.
  • It is before tax: different investors have different tax rates and some earnings are taxed differently. Read more.
  • It does not include any amounts not lent to businesses
  • It compounds interest after fees and bad debt, and therefore assumes re-investment
  • Past returns are not necessarily a guide to future returns

Estimated annual return at origination (based on estimated lifetime bad debts)

This is the estimated annual return after fees and bad debts, but before tax, as estimated when the loans were accepted. It does not change as the loans mature.

To calculate it we take the following for the loans accepted in the year:

Gross interest rate

This is the gross interest rate that businesses pay to investors for the money they borrow over an annual period. For a year’s originations, we take the average of these interest rates, weighted by the loan amount.

Estimated annualised bad debt rate

This is the percentage of a loan that on average will not be paid back in the future, on an annualised basis. It is the percentage of the loan that is lost net of the amount that is recovered. The estimated bad debt rates for all risk bands can be found on the statistics page. For a year’s originations, we take the average of the bad debt rates, weighted by the loan amount.

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 return. The formula takes a simple average of the estimated return after fees and bad debts, assuming re-investment of repayments at the same gross interest rate, for all loans accepted within the year.

Formula for calculating Estimated Annual Return

Limitations to this estimate

This return is the estimated annualised return after fees and bad debts for loans accepted in a particular year. 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.
  • It is before tax: different investors have different tax rates and some earnings are taxed differently. Read more.
  • It does not include any amounts not lent to businesses
  • It compounds interest and therefore assumes re-investment
  • Past returns are not necessarily a guide to future returns