Deviation yearly interest and expected return#159

I planned to invest 100 euros in a 7 year, 7,5% yearly return loan. The expected period return was however presented as around 136 Euros (about 5% yearly return). Can you please explain the deviation?

Hi Erik,

Thank you for reaching out to us.

The loan you referred to works with amortising repayments (monthly payments of principal plus interest). This means you get back part of your investment together with some interest every month. Because the amount you still have invested keeps going down, the interest is calculated on a smaller and smaller balance instead of the original full amount.

The quoted 7.5% is the yearly interest rate on the remaining balance (similar to how a mortgage works), not on the full €100 for the whole loan term. In reality, you are receiving repayments throughout, so you do not have €100 working for you for the entire period. This is why the expected return shown on the platform looks lower when expressed as one yearly figure compared with the 7.5% rate.

I hope this helps to clarify the difference. Please feel free to reach out if you have any further questions.

Best,

Liz

Thank you Elisabeth for an extensive and Quick reply! It makes sense ofcourse.

Best regards,
Erik Sönegård