When investing in crowdlending you often come across a situation when you have two loans to invest:
one with a risk grade A and a rate of 5%;
another with a grade B and a rate of 6% and you wondered which one is better?
To do so you need to calculate the so-called return on risk-adjusted capital (RORAC). This is a formula that banks often are using to understand how big interest rates should be to ensure proper return levels.
To make it easier for CrowdInform present to you the RORAC calculator designed by Vilson.
RORAC Calculator
Disclaimer: This calculator is prepared for general information purposes only.
How to use calculator
Interest rate: it is the annual % from an outstanding loan that the borrower is paying to you per year.
Probability of default (PD): is calculated by lender/ crowdfunding platform using historical statistical data and if let’s say 5 out of 100 companies with similar risk levels went bankrupt PD for such risk type companies will be 5%.
In simple words, if PD is 5% and you invest in 100 companies it is estimated that 5 of them will default*.
*if the economic/ market situation remains the same.
Where to get this data?
According to the new EU regulation, Crowdfunding platforms have to calculate and present the probability of default to investors, so if you are not sure where to find it ask your platform.
Loss given default (LGD): when a company goes bankrupt it does not necessarily mean that you will lose your entire investment. If the loan is secured with assets you can get part or even the full amount after the assets are sold.
LGD shows an estimation of how much funds you will lose if the company goes bankrupt. If you expect that in case the company goes bankrupt, you will be able to recover 80% of the total investment after the sale of available collateral, then LGD is 20%.
If your loan is unsecured, it is likely that recovery rates will be rather low and will depend on any cash the platform will be able to receive from the borrower before it is liquidated.
Where to get this data?
You should request this information from your crowdfunding platform.
About Vilson
Vilson helps people and organizations to define clear goals and achieve them. We help to maintain an effective financial management process, evaluate and execute investment and fundraising transactions, and find ways to improve business performance. More about us on www.vilson.lv.