Feature request: Align AWS borrowing with RW

[JumboShrimp]

How to align the AWS interest rates with real world:

One benchmark, often used for lending is the Prime rate.  That is the rate most commonly used for commercial lending, and margin over Prime is applied, based on the credit worthiness of the customer.  There are cases though, where the most credit worthy customers pay a rate below prime rate, but let's ignore that for now.

Here is the current rate:

The Current Wall Street Journal Prime Rate is: 3.25%

April 30, 2014: The FOMC has voted to keep the target range
for the fed funds rate at 0% - 0.25%. Therefore, the U.S.
Prime Rate will continue at 3.25%. The next FOMC meeting
and decision on short-term rates will be on June 18TH, 2014.

http://www.fedprimerate.com/

So, let's say the interest on deposit is 0.25%, prime rate is 3.25%

We can use this margin in the system, of 3%, difference between the borrowing benchmark and the interest paid on deposits, instead of the current 7% margin, to bring it closer to RL.  Of course, the interest rates would continue to be variable, as they currently are.

Then, the margins based on creditworthiness of the borrower can be adjusted, starting with AAA airline having 0% margin over prime (down slightly from the current), ending with CCC-D rated airline, with margins mostly unchanged from what the system already has.

This would align AWS much closer to real world.  It is still very conservative by not going below Prime, but much more realistic.

Additional welcome change would be removing cap from the secured loan availability, and fixing the order of how the credit facility is used (secured before unsecured, rather than the other way around.

With these changes, airline growth funded by direct borrowing rather than indirect (through leasing) would become a viable strategy for an airline to use.  Currently, it is not really a viable strategy.

Adopting this would cause no disruption to the currently running games.  Current loans can be left the way they are, players can refinance, if it is to their advantage.

[LemonButt]

Yes, but prime rate versus actual rate is typically scaled based on the size of the loan.  A $100 million loan might be at 3.25%, but a $50 million would be at +1%, a $25 million at +2%, etc.

[JumboShrimp]

Yes, but prime rate versus actual rate is typically scaled based on the size of the loan.

Really?  In the world of electronic banking the size makes a difference?  I really, really doubt that...

A $100 million loan might be at 3.25%, but a $50 million would be at +1%, a $25 million at +2%, etc.

Definitely not!

[JumboShrimp]

Loan quotes are very confusing.  Here is what they currently say.  Example: 12,000,000 loan, 8.5 + 3% interest rate:

•Interest rate+margin: 8.5 + 3 %
•Fees: 30 773 USD / wk
•Weekly payment: 240 142 USD (+ Fees)
•Total cost: 14 358 493 USD

I have no idea what this means, it does not align to anything that I can calculate, and it still leaves the nebulous Bank Fees unknown.  Normally, loan payments are monthly, but to avoid dealing with accrued interest, weekly works just fine.  I can't seem to be able to convert between annual to weekly in any meaningful way.  I am not even sure what type of method it uses.  Typical commercial loans are based on Constant Principal payment (with declining interest payment with declining principal.  Alternative is Constant Monthly payment, used mostly in mortgages etc, where the monthly payment is constant, and principal payment varies over the life of the loan.  The system should say what method it is using, and then, assuming it is Constant Principal method, it should say:

Instead, it should say:

•Interest rate+margin: 8.5 + 3 %
•Bank fees: (show the value or formula)

•Weekly Principal Payment: $
•First Week Interest payment: $
•First Week Bank Fee: $
•Total First Week Payment: $
•Total cost: $

[JumboShrimp]

Another point: The Bank Fees.

The bank fees the system uses are out of this world.  I have a commercial loan and a line of credit.  There are no Bank Fees applicable to these.  Bank rolls whatever fees it thinks it is applying into the interest rate.  I do pay bank fees, but it is for all the other accounts.  The fees are related to transactions / activities for those accounts.  Let's say I issue a check, or deposit a check, there are some fees involved etc.

The system is not charging any Bank Fees where banks do charge bank fees, but it is charging Bank fees where banks do not charge separate Bank Fees - loans.

I think the system should just scrap them from the system, and if anything that I could see the system charging is a pre-payment penalty.

Regarding loans, since we do not have a line of credit as a feature, shorter repayments (1 month to 12 months) should be added to the selection.  Players who just need a very small amount, to avoid going into the red on days when some large payments are due (payroll, taxes) end up spending a fortune on these Bank Fees, when the player repays a loan that was meant to be a very short term loan (but 1 year term had to be selected, because that's all the system offers).

[Sanabas]

Loan quotes are very confusing.  Here is what they currently say.  Example: 12,000,000 loan, 8.5 + 3% interest rate:

•Interest rate+margin: 8.5 + 3 %
•Fees: 30 773 USD / wk
•Weekly payment: 240 142 USD (+ Fees)
•Total cost: 14 358 493 USD

I have no idea what this means, it does not align to anything that I can calculate, and it still leaves the nebulous Bank Fees unknown.  Normally, loan payments are monthly, but to avoid dealing with accrued interest, weekly works just fine.  I can't seem to be able to convert between annual to weekly in any meaningful way.  I am not even sure what type of method it uses.  Typical commercial loans are based on Constant Principal payment (with declining interest payment with declining principal.  Alternative is Constant Monthly payment, used mostly in mortgages etc, where the monthly payment is constant, and principal payment varies over the life of the loan.  The system should say what method it is using, and then, assuming it is Constant Principal method, it should say:

Last time I looked, when I didn't like what partial lump sum payments were doing, it was quite easy to calculate stuff yourself. It is what you describe as constant monthly payment, just that the payment is weekly. Same payment every week, steadily increasing part of that payment is principal. The interest rate used in your example is 11.5%, which is the ingame interest rate + the margin. Numbers for the calculated weekly payment matched up well with the formula to calculate periodic payments.

Agree that the fees are nuts, and would be better off without them. Did you make a typo, or does your example loan really have fees that are ~12% of the weekly payment?

[LemonButt]

Really?  In the world of electronic banking the size makes a difference?  I really, really doubt that...

Definitely not!

Here are margin loan rates from Scottrade as an example.  This assumes 100% leverage, meaning if you borrow $1 million that you have $1 million in assets with them.

Loan Balance    Interest Rates
$0.01 - $9,999.99    7.75%
$10,000.00 - $24,999.99    7.50%
$25,000.00 - $49,999.99    7.25%
$50,000.00 - $99,999.99    6.75%
$100,000.00 - $249,999.99    6.50%
$250,000.00 - $499,999.99    6.25%
$500,000.00 - $999,999.99    5.75%
$1,000,000.00 and above    5.25%

The bigger the loan, the lower the interest rate.  Jumbo mortgages also have a lower rate than non-Jumbo: https://www.wellsfargo.com/mortgage/rates/

[JumboShrimp]

Last time I looked, when I didn't like what partial lump sum payments were doing, it was quite easy to calculate stuff yourself. It is what you describe as constant monthly payment, just that the payment is weekly. Same payment every week, steadily increasing part of that payment is principal. The interest rate used in your example is 11.5%, which is the ingame interest rate + the margin. Numbers for the calculated weekly payment matched up well with the formula to calculate periodic payments.

Makes sense, I was completely assuming that the loans are Constant Principal payment, and I did not even plug the other method into Excel.  It would be nice to have an option.  For example, getting a long term loan to finance a purchase of an aircraft, that method makes sense.  But for shorter term borrowing, the Constant Principal method is far more common.

Agree that the fees are nuts, and would be better off without them. Did you make a typo, or does your example loan really have fees that are ~12% of the weekly payment?

Like I said in another post, the Bank Fees are out of this world.  There is really no equivalent in the real world to see the bank fees being that high.

Without doing too much work to reverse engineer the formula, just a ballpark, on a 100m worth of loans, I am paying an annually > 4m in Bank Fees, which means > 4% rate on the Bank Fees alone.  I am not even sure Sami as aware of this, that he intended it to be the case, or if it is a bug.  Seems like it.

[JumboShrimp]

Here are margin loan rates from Scottrade as an example.  This assumes 100% leverage, meaning if you borrow $1 million that you have $1 million in assets with them.

Loan Balance    Interest Rates
$0.01 - $9,999.99    7.75%
$10,000.00 - $24,999.99    7.50%
$25,000.00 - $49,999.99    7.25%
$50,000.00 - $99,999.99    6.75%
$100,000.00 - $249,999.99    6.50%
$250,000.00 - $499,999.99    6.25%
$500,000.00 - $999,999.99    5.75%
$1,000,000.00 and above    5.25%

The bigger the loan, the lower the interest rate.  Jumbo mortgages also have a lower rate than non-Jumbo: https://www.wellsfargo.com/mortgage/rates/

There is something completely different going on here.  The online trading companies use the amount of assets as a proxy for your credit worthiness.  So if you qualify for $1m worth of margin, you are considered to be credit worthy, and lower rate is available to you.

On the other hand, if you are an equivalent of say A rated company, and you have 2 loans, one is 10x the other, the interest the bank will charge you is going to be the same.  Because they already know that you are an A rated company.

[JumboShrimp]

I think the loan availability should be fixed:

Remaining Secured Loan Availability = Total Secured Loan Availability - sum (Secured Loan Balances) - sum (Unsecured Loan Balances)

Remaining Unsecured Loan Availability = max (0, min (Total Unsecured Loan Availability, Remaining Secured Loan Availability) - sum (Unsecured Loan Balances)

Currently, the Remaining Unsecured Loan Availability is incorrect.  It is something along the lines of:

Remaining Unsecured Loan Availability = max (0, Total Unsecured Loan Availability - sum (Secured Loan Balances) - sum (Unsecured Loan Balances)

[JumboShrimp]

Agree that the fees are nuts, and would be better off without them. Did you make a typo, or does your example loan really have fees that are ~12% of the weekly payment?

Just monitoring the fees.  They seem to be some percentage of the original principal, when the loan originates.  Somewhere in 4-5% equivalent added to the interest cost.

But the screwy part is that they remain constant throughout the life of the loan.  So now I have a loan that is partially paid, maybe 2/3 remaining.  The Bank Fees being constant, as a percentage of principal, the Bank Fees keep growing, now at 6% annually of the current principal.  When the loan is about 2/3 paid, 1/3 remaining, the Bank fees will reach 10% annually.

I am pretty confident it is a bug, that Sami perhaps meant the Bank Fees to be 1/100s of what they are.  But ideally, they should be removed, since there is no RW equivalent of anywhere near this magnitude.

[JumboShrimp]

More on the fees:

When repaying a loan, the system charges approx. 1/3 of the fees for the rest of the life of the loan.  What does it mean (with fees being so high, almost of this real world?

It means borrowing, say $10m, just to meet the payroll, paying it a week later, it means paying $500,000 interest for this one week loan.  The effective interest rate on this short term loan (with Bank Fees Included) is approx. 260%   That's an interest rate in the loan shark range.

I can't believe no one ever noticed this or took time to check...

[JumboShrimp]

Ok, here is another example of how the Bank Fees are really wrong:

Loan period: 1 year
Loan amount: 10,000,000
Interest rate: 11.5%

Interest paid over the life of the loan: $606,254
Bank Fees paid over the life of the loan: $1,359,132

What is the rate of interest that would result in $1,359,132?  I don't feel like figuring it out, but let's just say it is > 2x of the 11.5% since the Bank fees are > 2x the interest paid.

So on this loan, the player pays:
11.5% interest rate
23.0% equivalent interest rate on Bank Fees
33.5% effective interest rage on the loan

[Luperco]

Hi

I agree. The calculation is wrong or not what expected.

On a loan of 7000000 for one year, I'm going to pay 24% of bank fee. Anyway the total cost of the loan is only 33% instead of 44.5% (fee + 12.5% + 8% margin+interest).

Anyway I'm not going to take that loan  :-)