Dear Seeking Profit,
We typically look at profitability on an annualized % basis; thus, we calculate a segment’s weighted average interest rate (WAIR) and subtract from that an annualized charge-off ratio (C/O Ratio) and any expense ratios or cost of funds (again on a annual % basis).
Loan Type WAIR C/O Ratio Net Yield Cost of Funds Contribution
Loan Type A 5.0% – 1.0% = 4.0% – 0.5% = 3.5%
Loan Type B 4.5% – 0.75% = 3.75% – 0.5% = 3.25%
There are some reports (performance consolidated, static pool, etc.) that use dollar figures, but these simply multiply the applicable balances by the rate. So in short, we don’t use actual interest or expenses in dollar terms, we estimate profitability using rates.