What are Discounted Loans?
A Discounted Loan is a loan sold by its owner at a lower price than the amount the borrower actually owes. The borrower is still responsible to pay—and Discounted Loan investors are entitled to receive—the entire actual loan amount and corresponding interest, creating an opportunity for investors to earn higher yields than they might on similarly priced non-discounted loans. In other words, investors in Discounted Loans are entitled to receive interest payments based on a higher principal amount than price of the Discounted Loan and the additional principal amount above the discounted price.
Are these performing loans?
Yes, Discounted Loans placed on PeerStreet’s platform are performing at the time of posting.
Why are these loans discounted?
Just as with other investments, the pricing for loans is subject to change based on current market conditions. In some cases, loans that were originated in the past may have been originated with interest rates that are lower than what investors demand in the market today. In those cases, if the loan holder wants to sell the loan, they must do so by offering a discounted price to satisfy the higher interest rate yields that investors demand in the current market.
How can Discounted Loans generate higher yields?
Assuming that the loan pays interest and principal as agreed, the investor earns a yield that is higher than the note rate because the investor receives the interest rate stated on the note throughout the term of the loan and also receives the full loan amount upon payoff of the loan. Since the loan was purchased at a discount—but the investor receives the full loan amount back upon payoff—the investors yield on that investment will be higher than the note rate stated on the loan.
|Returns and Yield to Maturity on $1,000,000 Loan|
|Loan Amount: $1,000,000||Original Loan Amount: $1,000,000|
|Rate: 8.00%||Rate: 8.00%|
|Term: 12 Months||Term: 12 Months|
|Discount %: 2.00%|
|Loan Price: $1,000,000||Discounted Loan Price: $980,000|
|Expected Interest Return: $80,000||Expected Interest Return: $80,000|
|Expected Gain on Principal: $0||Expected Gain on Principal: $20,000|
|Expected Yield to Maturity: 8.00%||Expected Yield to Maturity: 10.20%|
What is Yield to Maturity?
Yield to Maturity (YTM) is the expected annualized return that investors will receive from the time that they invest in a loan through the current stated maturity of the loan, provided the loan performs and pays off as expected.
The YTM is made up of both monthly interest payments expected to be collected during the term of the loan and the repayment of the full loan amount at maturity. If the loan pays interest and principal as agreed, the investor who bought the loan at a discount would collect interest during the term of the loan, plus the difference between the actual loan amount and the discounted price upon payoff of the loan.
The actual annualized YTM received by investors may be lower or higher than initially anticipated. Actual YTM can be impacted by a variety of things, including:
- Loan performance: Like any loan investment, if a loan goes into default, the annualized yields to investors may be lower than initially anticipated or even negative
- Extended payoff: If a loan is extended beyond the actual maturity date, the annualized return to investors would be lower than the initially anticipated YTM
- Early payoff: If a loan pays off early, the annualized return to investors would be higher than the YTM originally calculated
Using the example loan above, here are YTM calculations under the extended payoff and early payoff scenarios:
|Loan payoff is extended 6 months beyond the original maturity||Loan pays off 6 months earlier than the original maturity|
|Loan Amount: $1,000,000||Loan Amount: $1,000,000|
|Discounted Loan Sale Price: $980,000||Discounted Loan Sale Price: $980,000|
|Discounted Expected Return: $100,000||Discounted Expected Return: $100,000|
|Original Term: 12 Months||Original Term: 12 Months|
|YTM: 10.11%||YTM: 10.11%|
|Actual Term: 18 Months||Actual Term: 6 Months|
|Actual Return: $140,000||Actual Return: $60,000|
|Actual Annualized Return: 9.44%||Actual Annualized Return: 12.14%|
Are Discounted Loans eligible for Automated Investing?
Can yield bumps be applied towards these investments?
No, yield bumps cannot be applied toward Discounted Loans.
Does PeerStreet offer dynamic pricing on Discounted Loans?
Yes, PeerStreet reviews investment offerings daily and adjusts investor rates to fill the investment offering based on current market demand. All investors in the current series will be automatically updated to the current discount at the time of adjustment. Please note, discounts are not applied to investors in a previously closed series of the loan. If an investor in a previous series wishes to benefit from the discount, they must place a new investment in the Discounted Loan.
Why is PeerStreet offering Discounted Loans?
Our Discounted Loan offerings are part of PeerStreet’s continuing evolution toward a more active, dynamic marketplace that allows investors to invest in a variety of loan types. In the future, PeerStreet plans to offer distressed or non-performing loans on its marketplace and to allow investors to dynamically price and trade loans.