GROUNDFLOOR is teeing up to make its first loan repayment to investors in the next few weeks. This is extremely exciting on multiple levels, not the least of which being that we get to demonstrate one of the primary benefits of investing in peer to peer leading -- earning money on your money! This milestone presents a unique opportunity to investors to start earning compound interest, also known as “earning interest on your interest.”
If you invested in a GROUNDFLOOR loan, you are currently earning interest on the principal you invested (also known as simple interest). If you take the money that is repaid and reinvest it in a new loan, you will now be earning interest on the principal and interest.
You may be asking how rolling over a loan is any different than investing in a long-term loan. If you break down the numbers, it becomes clear that earning compound interest is a more profitable long term investment strategy.
Here's an example. If Person A invests $1,000 in a 5-year simple interest loan earning 12% APR, at the end of 5 years he has earned $1,600.00. By contrast, if Person B invests $1,000 in 5 separate 12-month loans earning 12% APR and rolls each of her annual repayments into a new 12-month loan, she will earn $1,762.34.
Here's the breakdown:
Year 1 - Initial investment amount (principal) = $1,000
End-of-year earnings = $1,120
Year 2 - Rollover amount = $1,120
End-of-Year 2 earnings = $1,254.40
Year 3 - Rollover amount = $1,254.40
End-of-Year 3 earnings = $1,404.93
Year 4 - Rollover amount = $1,404.93
End-of-Year 4 earnings = $1,573.52
Year 5 - Rollover amount = $1,573.52
End-of-Year 5 earnings = $1,762.34
As you can see, Person B earns an additional $162.34 (this is the interest earned on interest). As it relates to GROUNDFLOOR, beyond making the money go further financially, investing in 5 separate loans also gives the investor the satisfaction of having helped make 5 projects possible, creating a greater impact in the local real estate market.
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