This topic may be basic "LC 101" for many but I needed to put it together for myself. Thought I'd share with any other Folio noob's that have to figure out the relationships between original loan interest rate, number of remaining payments and yield to maturity (IRR).

First the ground rules. There is no markup or discount considered, nor for that matter any Folio trading. The YTM's shown are those that an original note purchaser would compute both at loan origination and after each monthly payment. All loan payments are made on time and in full (no prepayments or late payments). LC's service fee is 1% of the monthly payment amount. For the example below, current LC interest rates were chosen for a 36 month loan.

The first thing to notice is that the YTM of a brand new note, zero payments yet made, is anywhere from 0.67% to 0.77% less than the quoted annual interest rate of the loan. Example, E1 interest rate is 22.39% and YTM is 21.65%. YTM is the annualized interest rate of the monthly payments to be received by us lenders AFTER LC has taken its 1% cut. Were it not for the LC fee, YTM would be exactly the quoted annual interest rate of the loan.

Secondly, since these are fully amortizing loans the monthly payment is a constant amount. As a direct result LC's monthly service fee is also a constant amount throughout the life of the loan. Whether it's 1% or 10% the borrower isn't concerned with the LC service fee and never sees it. The borrower sees their principal owed reduced by the full amortized amount for each monthly payment. So, given a fixed monthly payment amount and an amount guaranteed by the amortized loan agreement to go towards reduction of principal what we have left pays LC's service fee and we keep what is left after that as interest.

Thirdly, in a fully amortizing loan the amount of each subsequent monthly payment that goes towards reduction of the borrower's principal owed increases. That leaves less to cover LC's fee and to cover what we receive as interest. Since LC's fee is constant throughout the loan the ratio of what we are left with divided by LC's fee goes down with each payment (LC's share of the interest pie gets bigger). Every month our YTM falls because of this effect.

As you can see in the table, early in the life of the loan when the principal reduction component of the payments is small and the interest component is large YTM creeps down slowly. Towards the end of the loan when most of the payment goes towards principal reduction and interest is small YTM crashes (% Change Column is month to month YTM delta). It actually goes negative for the final 3 payments of an A1 loan and the final payment of a B1. Funny; someone should check my math. If true one cannot list their A1 note at 0% markup/discount with less than 4 months to go and comply with the rules of the road.

Edit: It is interesting that the month to month YTM delta is constant across original interest rates. An A1 drops the same YTM percent in any given month as a G1. That was surprising. Maybe it shouldn't have been.

I have marked two lines in the table in blue; 12 and 24 months into loan payments. After 12 months YTM is about 1% less than original interest rate and after 24 months it's about 2%. All due to the natural causes described above. Just the way it works.

For those who prefer graphs over charts here's the same data "visually":

Cheers!