Interested in learning more about interest? As a peer-to-peer lending platform dedicated to opening up real estate investment opportunities to the other 98%, it is important that all of our investors understand the terms of their investment. Several folks that we have spoken with have expressed confusion at the concept of earning an annual percentage rate on a six-month loan. We thought we would take a moment to explore the concept of interest in general.
Similar to a person being charged rent each month to lease out a property, interest is essentially rent being charged on money that you have loaned to another person. Interest can be calculated in several different ways (e.g. flat, amortized, daily, monthly, etc), but here at GROUNDFLOOR we calculate interest using an annual percentage rate - a single number that represents the cost of “borrowing money” for an entire year. Where this can get confusing is if the loan repayment period is less than a year or more than a year. The first six loans that GROUNDFLOOR has funded have all been 6 month loans. Since six months is half of a year, this means that the investor will actually earn half of the APR so, for example, a 10% APR would actually equate to a 5% return. Alternately, if a loan is being repaid over multiple years the return remains 10% per year but the investor will make more money because the money is being loaned out for a longer period of time. So for a loan with a 10% APR and a three-year repayment term, the investor would technically be making more than a 10% return at the end of the three years, but the number to pay attention to when comparing to other investment opportunities is the APR.
This month GROUNDFLOOR is offering its first 12 month investment opportunity with a $75K loan for 1419 Gus Thornhill Drive Jr. This project gives GROUNDFLOOR investors the opportunity to earn the full annual percentage rate (in this case) 12%.
Have any other questions about how investing with Groundlfloor works? Don’t hesitate to reach out.