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How we calculate returns

We show you an actual rate of return and an expected return to help you assess the performance of your investment.

The actual rate of return is an annualised return based on the actual cashflows in and out of your lending portfolio. It provides a percentage number that represents the returns you have made so far from the date you started lending.

The expected return is the likely annual return you should expect from lending to businesses on our platform based on the loans you hold at the time of calculation.

More details of each calculation are shown below.

Actual rate of returns

This is a percentage annual return earned to date as a percentage of your investments made with LendingCrowd after all fees and bad debts have been deducted. It doesn’t take tax into account because this is a matter unique to you. As this is an annual return, your actual rate of return will not be shown in your account until you have been investing with LendingCrowd for three months.

For those familiar with Excel spreadsheets, we calculate the return in the same way as the XIRR function. The calculation uses daily cashflows of positive and negative historic transactions plus a final transaction representing the current value of your portfolio.

We use the information shown below during the lifetime of your investment with LendingCrowd to calculate an annual percentage return:

Daily historic cashflows

These represent the cash in and out of your account to and from your lending portfolio:

  • amounts lent to businesses – these are registered from the day you bid at auction or the date you buy a loan on the Loan Market
  • any amounts received in repayments, including interest and capital
  • any proceeds from the sale of your loan parts, after fees
  • any recovery amounts you’ve received – this includes the outstanding capital and interest due to you from a bad debt
  • any other fees that you’ve paid to us
  • promotional bonuses (if there is a lock-in period, the bonus amount is accrued daily over the lock-in period).

Note: these cashflows do not include cash deposits and withdrawals made by you, as we treat the moment of investment (through bidding at auction or buying loans from the Loan market) as the point at which you commit money in a loan.

Value of your portfolio

This is based on the outstanding principal of each of the loans you hold. In order to provide an accurate valuation:

  • For borrowers with up-to-date repayments, we add accrued interest (interest earned but not yet paid to you) to the principal outstanding on each loan.
  • For overdue loans, accrued interest is not applied, and instead we reduce the principal outstanding to reflect the likely probability of default and recovery post-default.
  • For bids on loans not yet completed, we only consider the value bid as the valuation; we do not add potential accrued interest.

Points to remember

This approach has been verified by third-party lending performance data specialist, Brismo, which provides independence and credibility to the returns we show on our platform. Please remember:

  • Your returns don’t consider any reduction in earnings due to tax.
  • We don’t consider your cash deposits or withdrawals, therefore we do not consider cash amounts not yet lent to businesses.
  • In valuing the portfolio, we do not take account of any potential deductions to account for selling or withdrawal fees.
  • Past returns are not necessarily a guide to future returns. Your eventual returns may be higher or lower than those you see today.

Expected return

Your expected return is a statistical forecast of the annualised return you’re likely to earn on your capital after fees and defaults are taken into account. It doesn’t take tax into account because this is a matter unique to you.

An expected return will be shown for each loan on the platform. You’ll notice that this number is different from the interest rate the borrower pays you, as the expected return takes into account the likelihood of the borrower not meeting their repayments to you and the risk of you losing money (bad debt).

LendingCrowd works in partnership with data analytics specialist, Brismo, which independently verifies the risk framework and loan level valuations used by LendingCrowd.

The expected return for a loan is calculated using the following information:

Probability of default (Pd)

From historical analysis of our loan book, supplemented with industry benchmarks, we calculate the probability of a loan defaulting for each Risk Band. These values may be updated from time to time to reflect changes in the default rates in our loan book. To make sure we’re fair as to how we calculate this, we use an independent third party, Brismo, to calculate and verify our probabilities of defaults.

Loss given default

The loss given default (LGD) is a figure we use to indicate the typical recovery you can expect after a loan defaults. This is based on statistical analysis of our loan book, supplemented by industry benchmarks for recoveries of SME loans. Loans that are secured with a named asset – highlighted with Standard Security/Legal Charge on the platform – have a lower LGD than other loans.

Changes in expected returns

During the loan term, the credit outlook of the borrower can change. This may be as a result of a missed repayment, or information we’ve received from the borrower, or from third parties such as credit reference agencies. When this happens, we’ll update the expected return to reflect the borrower’s latest credit outlook. This means the expected return of your loans may change over time.

Portfolio expected returns

To give you an indication of how your loan book is performing, we’ll also show an expected return for each LendingCrowd account you have and for your portfolio as a whole. This is calculated from the expected returns of your loan holdings across your portfolio. For our Growth and Income accounts, we also take into account cash that you haven’t lent out, which doesn’t earn interest.

The portfolio expected return has been developed with Brismo.

Points to remember

The expected return is only an indication of the performance of your accounts in future, given the status of your loan book today. It doesn’t take into account earnings you’ve made to date, nor is it a guarantee of future returns. The actual return you earn may be higher or lower than your expected return.

In calculating an expected return for a portfolio of loans we have to make some assumptions about the make-up of your loan book and the amount of cash you have waiting to lend. These assumptions are outlined below:

  • Repayments from loans will be immediately re-invested in new loans of similar expected returns. Interest is therefore compounded monthly on Growth and Self Select accounts.
  • The amount of cash waiting to be deployed into loans in Growth and Income accounts will remain in the same proportion when compared to your loan portfolio – we call this cash drag.
  • Available cash is not considered for expected returns for Self Select accounts as it is up to you to withdraw or lend any cash available in this type of account.
  • Cash deployed as bids in new loans are given an effective return of 0% until the loan is paid to the borrower.
  • Defaulted loans, subject to recovery payments, are not considered in your portfolio expected returns as they have already been de-valued – defaults are considered in your actual rate of return.
  • There is no consideration of tax on earnings in the expected return calculation as this is a matter unique to you.

When lending to businesses, it’s important to remember that your capital is at risk.

If you invest through LendingCrowd you should understand that your capital is at risk.

LendingCrowd is the trading name of Edinburgh Alternative Finance Limited, Company Number SC468392, authorised and regulated by the Financial Conduct Authority (Firm reference number 670991). LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.

Read more about the risk involved when investing and borrowing.

The company's registered office is 23 Manor Place, Edinburgh, EH3 7DX.

Copyright © LendingCrowd 2020. All rights reserved.

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