What is an interest rate?
As a borrower, an interest rate is the rate at which you are being charged for your borrowing, and it is generally based on a percentage of your borrowed amount applied over a period of time. Most lending institutions charge a fixed (not subject to change) interest rate, whether it’s against a loan or credit card purchase and repayments.
For Lenders, an interest rate is the gross yield (return) on your investment, generally based on a percentage of the amount you invested as a per annum rate.
There are a range of factors that contribute to setting an interest rate, and different banks and financial institutions have their own formulas for calculating the rate.
How Harmoney calculates interest rates
Harmoney’s interest rates are based on the risk grade of the borrower, amongst other factors. If Harmoney approves your loan application, we will assign a credit grade, which will cap the maximum amount you can borrow, and the interest rate that will apply. In addition to this, we consider your ability to service the loan (i.e. your ability to make repayments), which may further restrict the maximum amount you can borrow, but will have no impact on the interest rate.
Interest rates and fees
Harmoney’s interest rate and fee structure is totally open and transparent.
Lenders, please note that references on the Harmoney website to interest rates and rates of return are expressed as gross returns, before deduction of any fees or without any withholding or deductions, unless otherwise specified.
What is compound interest?
A simple way to think about compound interest is “interest on interest” – the amount of interest paid on both the initial investment amount and any interest accumulated since the initiation of the investment.
For Lenders, compound interest is important as it can give you an indication of how your investment is likely to perform if you continue to reinvest your principal and returns over numerous years. You can also learn more about forecast loan performance here.
Harmoney investments do not automatically compound - you must reinvest interest earned on your investment to get the impact of compounding interest.
Set interest investment
Harmoney does not have a set rate for Lenders, just as we don’t have a set rate for borrowers. Not all borrowers are the same, and the size of your loan and the length of time you wish to pay it back in is going to differ from person to person; which is why our interest rates differ from person to person. Our interest rates are calculated according to the risk grade assigned to borrowers, and as Lenders have the opportunity to invest in numerous loans with varying interest rates, the overall interest they receive on their total investment will be dependent on the rates of the individual loans they invest in.
Fixed interest investment
A fixed interest investment is where a lender loans money to a borrower, and the borrower then pays a fixed (not subject to change) amount of interest over a fixed period of time. There are many types of fixed interest investments, the most common being bonds and term deposits.
Harmoney’s loans differ from fixed interest loans in that our Lenders generally do not directly fund only one borrower. To minimise the risk to Lenders, our loans are fractionalised into $25 notes that can then be invested in multiple individual loans. Effectively, Lenders are holding numerous fixed interest investments within one portfolio.
Because there are multiple investments, there will be multiple loan holders with varying interest rates and terms set for their loan. Therefore, while the individual notes could be considered fixed interest investments, an Lender’s portfolio as a whole is subject to change, with different loans paying off at different times with different interest rates.
Loan interest and lenders
When you invest with Harmoney, borrower repayments are returned to your Lender account, with the option of being withdrawn or reinvested.
Lender funds that are not on loan are held in a trust account and do not accrue interest. Lenders are charged a Service Fee of 2% of the principal and interest payments collected on each note, and a $1 Note fee for every individual loan bought in the Marketplace. The service fee is deducted from repayments into the Lender’s account. Find out more about Harmoney's fees.