The turnover period, or the period for which the percentage is stated is considered to be 1 day. If someone offers you a loan at 5%, that means that every day, you will owe a further 5% on what you borrowed. This assumption also means that the interest is compounded daily.
Risk-free interest: The rule is: The higher the Risk, the greater the Return. Therefore, "risk-free interest" (quote marks because nothing is risk-free) is the lowest return you can ask for. This can get as low as say... 2%. 2% is all a lender could claim if the borrower was going to shuttle goods that guarantee a return in the safest of all routes, i.e. no risk. The higher the risk, the greater the return the lender can demand. Factors that influence (or will influence in the full release) risk can be: Time before return is generated, distance of the trip (possibility of ambush/attack, as well as time taken per trip), supply/demand of the trade good (the drug run, for instance, would be a fairly risky venture, because there are quite a lot of people running the route, so you're not guaranteed as big a return as if you were running solo), safety of the area (Pirate activity, hostile corporations, etc...), potential richness of an asteroid field, etc... I cannot list all the possible scenarios, so it's up to the 2 parties to reasonably assess the risk involved.
Loan Security: I don't know if anyone gave this any thought, but all of the loans so far I've given and taken have not been secured by anything. A secure loan means that if the borrower fails to repay the due amount, the lender has claim to his assets. An unsecured loan means that if the borrower is unable to repay the debt, the lender loses the money. Unsecured loans therefore always have a higher interest rate.
Information: This assumes that the borrower knows enough about the venture to give a detailed description to the lender. If someone came up to me and said "Uhh, can I have some dough? I'll pay you back...", guess my response. On the other hand, another person says "I need 1,000,000ISK for a 2-jump trade run. I expect to make a number of round trips, with a simple (as opposed to compound) profit of 8% per trip". The difference is huge.
Simple vs. Compound Profit: compound profit is using the money generated in the previous round to generate extra profit. Most common example: first trip the cargo hold may be 75% full. After returning, the extra money allows it to be filled up to 80%... after 2nd trip, 86%, and so on... Simple profit: cargo full from 1st trip to last.
2 General Advice
1. Always count your gains and losses before both lending and borrowing money.
2. Spending some time with the other party discussing the loan will always make it more beneficial for both.
3. Before borrowing money, make sure to compare the different loan structures and find the best suiting one. Obviously you can't know the exact terms before negotiating, but have a good idea about what you want and what you'll need.
4. When borrowing, consider the risk of the venture and whether you can secure it by any of your assets.
5. Do not borrow more than you need to.
6. Before lending money, make sure that you cannot generate greater return on it yourself. Lending a million to someone at 6% is foolish if you can generate 8% on it yourself.
7. Do not lend more than you can afford
3 Individual Loans
3.1 Percentage Of Income
A fairly common structure for lending money. As the name implies, the lender gets a portion of the net profit from the venture. How much can the lender demand? This is just about the only loan type that doesn't need to follow the risk/return guideline, the percentage kept by the lender is totally negotiable. From the borrower's point of view, the percentage has to be low enough to make the venture worth while. From the lender's point of view, he wants the return to be as high as possible, but not so high as to scare off the borrower. If the borrower sees that he can get the funds cheaper using one of the other loan types, the lender just lost a customer.
Calculating ROI (Return on investment): Suppose a 1,000,000ISK 25% loan to a trader who guarantees 8% return on the goods traded. The lender would get 2% of net profit on the 1,000,000ISK invested, or 20,000 ISK/trip. In 10 trips, the return is 200,000ISK... in a day... for doing NOTHING... That's pretty good. Consider the same loan, but to a ship-builder. The lender will get 25% of net profit from sale of the ship. The total manufacturing cost is 1.5m, the selling price=2.1m. Therefore the lender gets 150k from the transaction. As you can see, borrowing and lending stimulates business. Without being able to loan, the trader would have to accumulate the 1,000,000 ISK before he can be as effective and the shipbuilder is in even more trouble... he would have to wait a long time before building even his 1st ship...
3.2 Simple Interest
Another common loan structure. The lender requests a specified amount to be repaid at a specified date. For example, You loan 100,000 ISK to a new player, and expect them to pay back 150,000 ISK in about a week... Therefore, you are demanding 7.14%/7day unsecured loan agreement. The date and the rate are established before the loan is granted. The borrower should ensure that his plan allows him to repay the loan and still make a sufficient profit to make it worth while. For example: a 1,000,000ISK loan @ 5%/3day agreement, amounts to the borrower having to repay 1,150,000 ISK in 3 days. If in those 3 days he can generate 250,000K net profit, he keeps 100,000 and the lender keeps 150,000. However, if he doesn't borrow the money, he can generate 110,000ISK by running a cheaper venture. In this case, the cheaper venture is better. This loan favors the borrower who expects to have many cash flows, like a trader or a miner, because the rate is fixed, so the amount you keep depends entirely on how much you work.
3.3 Compound Interest
The big brother of simple interest. What I found puzzling is that no one used compound interest when lending money. The most common excuse was "Can't be arsed". It's really not hard to calculate... Similar rules and advice applies as to simple interest. The key difference is that the amount returned gets compounded each day. The formula is Amount received = Loan * (1 + interest) ^ days. After a couple of minutes of thinking I realized why no one used it: All the loans are limited by time, so compound interest is just slightly higher simple interest. Therefore the compound interest loan is used on a loan not limited by time. On the formula above, Amount received becomes T1, and Loan becomes T0 (Time 1 and Time 0).
Example: Best to demonstrate with a practical example: I borrow 100,000 ISK under 5% compound interest. After 1 day, I owe 105,000 ISK. After 2 days, I owe 110,250 ISK. Suppose at that point I repay 30,250 ISK. The outstanding loan now stands at 80K. After day 3, I owe 84,000. So on, so on... If the borrower chooses to repay just the interest amount each day (5,000 in the example above), the amount outstanding is always at 100,000 ISK, and the lender gets 5,000 ISK/day for doing nothing. This is similar to bonds and notes. If the borrower repays an equal amount each day in excess of the interest, for instance, 10K/day, the amount outstanding is continuously decreased. This is similar to amortization.
4 Final Note
Loaning/investing helps give new players a boost and gives advanced players another leg up. YOU MUST HAVE CAPITAL TO CREATE CAPITAL. Don't go at this thing alone starting from scratch (unless you are one of us diehards that gets in day 1 hour 1 and does the hard-low margin work to build up capital.) If you own a corp instead of collecting ships and handing them out (communist model), consider doing peer-to-peer loans and corporate loans then let individuals create their own wealth. Your corp may invest 10 mil in Industrial, which then the lead can turn around and re-loan to people in that division.
