Business Loan Blog Image_Universe.png

The Most Powerful Force in the Universe - Compound Interest

Posted by Alan Fagan on Oct 30, 2018 4:02:13 PM

It’s often claimed that Albert Einstein thought compound interest to be ‘the most powerful force in the universe’.  Now, whether or not he actually said that is a matter of some debate. Whoever came up with the statement, however, wasn’t far off the mark.

Compounding your returns is a very powerful way to grow an investment.

Whether you’re planning for your retirement, saving to buy a house, or putting something aside for your children’s future, compound interest can be a powerful force in helping you achieve your financial goals.

By rolling returns back into your investment, you multiply the impact and by adding regularly to the pot, even with small amounts, you might be surprised at how quickly your investment can grow.

Let’s look at a Linked Finance example.  

Assume you have an initial amount of €10,000 to get your Linked Finance account up and running.

The average interest rate available on Linked Finance is about 10.5%. Let’s take off the Linked Finance service fee and factor in a very pessimistic discount for defaults and bad debts. Even still, a net pre-tax return of 7.5% is very achievable.

At its core, here’s how compound interest works.


 

Year 1

Year 2

Year 3

Opening Value

€10,000

€10,750

€11,556.25

Interest Earned

€750

€806.25

€866.72

Closing Value

€10,750

€11,556.25

€12,422.97


As you can see, the amount of interest you get each year increases because you’re effectively, earning interest on your interest.

The compounding effect has a really powerful impact over longer terms. After 10 years at 7.5%, your initial €10,000 has become €20,610.32. After 20 years it’s €42,478.51.

And that’s just with simple annual compounding and no additional investment.

With Linked Finance, if you topped up your initial €10,000 with just €50 per month, after 20 years you’d have €72,294.71.

That’s €50,294.71 in interest earned on total contributions of €22,000 over the period.

The tools you need for long-term growth.

At Linked Finance, we provide lenders with the tools needed to support this type of long-term investment.

Autobid - You can create an Autobid mix to suit your appetite for risk. This will allow you to ‘set it and forget it’. Your funds will be automatically redeployed as repayments are received, allowing you to easily unlock the power of compound interest.

Standing Order - You can also easily top-up your initial investment, with regular contributions via standing order. You can find full instructions for how to set this up in your Linked Finance account.

Now the figures here do not account for tax and you should seek independent advice on personal tax obligations arising from P2P lending. We have, however, been quite conservative with our estimated annual return of 7.5%.

The table below shows what the same initial investment of €10,000 and regular contributions of €50 per month would yield after 20 years at different rates of annual return.

Annual Return

5%

7.5%

10%

12.5%

Initial Investment

€10,000

€10,000

€10,000

€10,000

Monthly Top-Up

€50

€50

€50

€50

Contributions

€22,000

€22,000

€22,000

€22,000

20-Year Interest

€25,678

€50,295

€89,249

€151,184

20-Year Value

€47,678

€72,295

€111,249

€173,184

Business Loans but Different

A Better Way to Borrow for Your Business

Linked Finance connects great local businesses who need loans with thousands of individual lenders. This is about using technology to bring business lending back to basics; real people with savings lending to great local businesses at attractive interest rates. Businesses get the funds they need to grow, lenders make a fair return. Everybody wins!

If you need a loan to grow your business, talk to Linked Finance

  • You get a same-day credit decision.
  • You can borrow up to €250K.
  • No early repayment penalties.
  • A friendly, no-hassle approach.
  • Promote your business.
  • Win new customers as part of the process.

Subscribe to Email Updates

Need a loan to grow your business?

Apply online now in just 2 minutes!

Recent Posts