Author Topic: How can I calculate the present value or current value of a loan?  (Read 1759 times)

Mandy

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I am doing a case study on how to invest on peer to peer lending.
How can I calculate the present value or current value of a loan?
There are some features provided by LC including loan_amnt, funded_amnt, int_rate, installment, total_pymnt, total_pymnt_inv, total_rec_prncp, total_rec_int, total_rec_late_fee and so on.
How can I get the present value of a loan with the data provided?

Thank you for your time.

dompazz

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Re: How can I calculate the present value or current value of a loan?
« Reply #1 on: June 16, 2016, 09:12:44 PM »
Short answer - that's a loaded question and there is not an easy answer.

Long answer - assuming you understand how to calculate a NPV, plug the remaining cash flows into your NPV calculator, enter a discount rate, and hit enter.  The tricky part is the discount rate.  That's not easily defined and I guarantee if you ask 4 people on this forum, you get at least 6 answers.  You have to start with current loan rates.  Then you adjust for the time remaining on the loan.  Then you need to adjust for the credit quality of borrower, currently.  Choosing those adjustments is the hard part. 

If there were more clarity in the secondary market for loans, you could look at recent sales to help estimate the proper discount rate.  Unfortunately, that doesn't exist.  You can get fancy and attempt to back out a fair value and discount rate by looking at loans that are listed, but not sold (giving you an upper and lower bound for value and rate respectively).


(Now is when Anil can jump in and talk about how he does his estimation.)

AnilG

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Re: How can I calculate the present value or current value of a loan?
« Reply #2 on: June 16, 2016, 10:30:58 PM »
Short answer: Present Value of a loan is Outstanding Principal on the loan. You can also add accrued interest if you want to feel better.

Long answer: follow dompazz.
  • The outstanding principal (+ accrued interest if you want) discounted by the estimated loss based on loan status of similar loans.
  • The outstanding principal (+ accrued interest if you want) discounted by the lowest markup/ largest discount offered by the seller of a note from the same loan on Folio secondary market.
  • The outstanding principal (+ accrued interest in you want) discounted by the lowest/3rd quartile/mean/median markup offered by the sellers of notes from similar loans on Folio secondary market.
  • The present value of future monthly payments discounted by the interest rate for similar loans being offered now, over similar time frame.
  • The present value of future monthly payments discounted by the expected return/yield for similar/competing investments over same time frame.
  • Add any other DCF or relative valuation technique you want.
  • Any combinations of the above
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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