Measuring Returns on Revolving Credit Products

Summary

The document raises a measurement problem for comparing a credit card business with an installment loan business. The author uses an IRR calculation similar to spreadsheet XIRR, but finds that a revolving account can show a negative IRR when a customer draws more funds than they repay during the measured period. They also ask how to account for costs when the product balance and cash flows change direction.

No solution or evidence is provided: the text is a question seeking suggestions, and it does not establish that IRR is inappropriate or recommend a replacement metric. It highlights a useful modeling issue, though. Return measures depend on how cash flows, timing, funding, costs, and outstanding principal are defined, especially when credit is repeatedly drawn and repaid. A comparison would need consistent assumptions across products and companies; readers should treat the document as a problem statement rather than a tested methodology.

Key ideas

• The author compares a credit card product with an installment loan using an IRR-style measure.
• Revolving credit can have changing balances and cash flows that complicate interpretation of IRR.
• A customer drawing more money than they repay during a period can produce a negative calculated IRR.
• The document asks how to allocate costs when principal usage changes, but offers no answer or alternative metric.

Tags

# Calculate and compare IRR among products and companies


# Calculate and compare IRR among products and companies












I am trying to calculate return on investment for a couple of companies and their respective products. I have two main products:

- credit card

- installment loan

Owners would like to be able to compare these two companies (products) return on investment. What I have done so far is to calculate IRR (similar to XIRR formula and requirements in EXCEL).

1) The issue is that I am calculating IRR on revolving product. Consequently, when a customer is good but withdraws more money than returns the IRR is negative.

2) Additionally, I am not sure I am sure how to incorporate costs in the revolving product - I cannot put % of used principal because of the positive and negative cash-flows.

Any ideas how to overcome these issues (especially point 1); maybe use something instead of IRR as a metric?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.