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Loan shark interest rates

Tingyun

Corsair
Storm Modder
Because of my work background I spend a lot of time thinking about interest rates...;)

And this causes me to be sensitive to the fact that the interest rate paid by loan shark is way too high, from all of a gameplay, balancing, and realism perspectives.

First off, to make clear I'm not the only one who thinks this is a problem, here is Hylie Pistoff and Day Jack two years ago calling attention to this problem: Guide - How to get a very good start | Page 7 | PiratesAhoy!

Hylie Pistoff: "11% interest is waay too high! 3% tops I say."

Ok, so how does it work currently: if you give money to a loan shark, he pays you 1 + your personal commerce skill in interest per month. If you borrow, he charges you 11- your personal commerce skill per month.

What his means is, at commerce 6, the loan shark starts paying you a higher interest rate than he changes you, which is 100% wrong. Whoever originally programmed this misunderstood how interest rates are set: bargaining is a very minor element, almost everything is about risk (certainly risk sets the baseline around which things are determined). Anyone who works in the financial sector could tell you the loan shark would never offer you a higher interest rate for your money than what he is currently offering to lend to you at, unless he has gone quite insane.

The reason is, the loan shark is offering you a risk free investment (he will not default), while you have some risk of default, however small. Another way of looking at it, the loan shark is only willing to take your money if he has profitable uses for it, and if he is lending out at a lower interest rate, he would be taking a loss (i.e., even if in the specific transaction he only did one or the other).

So, to make a quick fix, let's pretend the player commerce skill is a reasonable proxy for how established he is as a safe investment (it probably gets at it pretty well, as it grows the more trading done, though maybe later a combination formula involving reputation, personal wealth, and fame could be employed instead).

Leaving interest rate for borrowing alone as above, quick fix proposal for investing rate:

Set the interest rate the loan shark pays your for money to 1% per month (12% per year) (there is little good reason to make it dependent on anything involving the player, as long as you have a basic level of competence you should get about the same amount depending on his general cost of capital)

This has advantages from all three game design perspectives:

Gameplay: the player should be encouraged to go out there and actively make money, just having capital compound on capital at a high rate is not what this game is about, players should make their money through privateering or active trading.

Balancing: the loan shark already bypasses the need for a merchant license to keep crew happy and keeps your money safe, 12% per year/1% per month on top of all that is more than enough.

Roleplaying/realism: 12% per year/1% per month risk free investment in the historical time period we are talking about is already insanely high. Going any higher than that is immersion breaking for role players with a finance background. Additionally, this ensures that the loan shark never offers a higher rate than he asks for.

If there are no objections, I can make the needed modification someday soon.
 
I think I'm going to not try to understand this right now.
It sounds quite complex and I've got enough legalise to wrap my head around right now! :sail

So I'll just assume you're making a valid point. ;)
 
@Pieter Boelen fair enough--a background in finance probably leads me to explain things in too much detail...

A shorthand version of the problem would be, Hylier Pistof's original suggestion to drastically reduce loan shark interest rates offered for player investment was in response to a player who reported accumulating over 500,000,000 gold by using the loan shark. ;)

A shorthand version of the solution is, when the player normally has to pay 1 million for a merchant's license, if he can get the same effect for free from a loan shark, let's at least keep the interest small enough that the player's own actions in privateering or trading remain the primary means of making money (this isn't sim-capitalist, it is a pirates game, after all).
 
@Pieter Boelen fair enough--a background in finance probably leads me to explain things in too much detail...
The point is more that "buying a sailboat" requires a lot of wading through legalese and financial stuff.
I'm quite capable of understanding that stuff, but since my day job is also quite mentally intensive, I have to be a bit careful on what I spend my mental capacities on. :facepalm
 
the interest rate paid by loan shark is way too high, from all of a gameplay, balancing, and realism perspectives.

Agreed :yes - but the question has to be asked - If players want to use the Loan Shark to help them to accumulate money, why shouldn't they ?
It is a perfectly legitimate way to play the game, and assists them in acquiring the more expensive equipment, ships, and ship enhancements that are in the game.


This has advantages from all three game design perspectives:

Gameplay: the player should be encouraged to go out there and actively make money, just having capital compound on capital at a high rate is not what this game is about, players should make their money through privateering or active trading.

Balancing: the loan shark already bypasses the need for a merchant license to keep crew happy and keeps your money safe, 12% per year/1% per month on top of all that is more than enough.

The Merchant License is a relatively new addition to the game, and its effect on the game's balance has not yet been fully appreciated - I don't think it was even in the game when the player who said they had accumulated 500 million made that post ( so how they accumulate their gold now has probably changed and become even easier ).


Roleplaying/realism: 12% per year/1% per month risk free investment in the historical time period we are talking about is already insanely high. Going any higher than that is immersion breaking for role players with a finance background. Additionally, this ensures that the loan shark never offers a higher rate than he asks for.

Up to the end of the 18 Century - the Bank of England rate was 5% per year ( see Data Spreadsheet here:- Interest rates in the UK since 1694. Download the data and see it visualised ) - it was 5% throughout the 18C

So the Loan Shark should be paying something close to what @Hylie Pistof suggested of say 3% per year. :yes - perhaps less

How much the Loan Shark charges when the player borrows from him - since the players sail away and the Loan Shark has no guarantee that they will come back ( and no items to hold as security - & has to send debt collectors/ bandits after the player to recover the debt - therefore has lots of expenses ) - the interest rate should therefore be quite high to cover bad debts - say 12% per year.

Interesting thought - should the interest charged by the Loan Shark be related to the Player's reputation. ( Worse Reputation = higher Interest charged. ) :unsure

:drunk
 
Interesting thought - should the interest charged by the Loan Shark be related to the Player's reputation. ( Worse Reputation = higher Interest charged. ) :unsure
At some point your reputation might get so bad that they wouldn't dare charge a high interest rate! :shock
 
@Talisman You are much harsher than me. ;) I proposed 12% per year/1% per month because it is easy (not sure if code handless fractional interest rates) and still gives the player a return that feels like something within the timeframe of the game (everything happening so fast in the game, if we made it a truly realistic low rate, it would feel like nothing to the player). you seem to favor a more realistic 0.2 per month or so.

So I am definitely proposing a somewhat higher value that yours as an unrealistic compromise to gameplay, and to allow that player choice to have the feeling of profitable investments.

(I think Hylie Pistof meant per month, since he was comparing it to the 11% current monthly amount, and since he said "tops", I think his opinion was: "no more than 3% per month at the most". Which means technically both my 1% and your 0.2% or so are consistent with his suggestion)

On the other issue of player borrowing, I actually think the rates the loan shark charges right now when he lends the player money (11%- player commerce per month) is about right, he is a loan shark, not a bank, it has to be very high (both for the realistic risk, and the gameplay of what the player can achieve with that money in a short time frame).

However, we both agree that it would be better to move to a formula based on actual risk, as player commerce skill is a somewhat bad proxy for this. I agree with reputation, perhaps also incorporate fame and player personal wealth, all of which get to his reliability to pay back.

Rather excited someone else feels like conferring on putting the lending system in order @Talisman ;)

EDIt: agreed with talisman on loan sharks and low reputation. They aren't going to hand over money to someone they fear, they will hide, call the guards, etc. Unless we want the merchants to also give free stuff to bad people, in which case we might as well add a "nice ______ you have here, would be a shame of something happened to it dialogue option generally, and let evil guys go around playing mob protection money collector" still, one would expect merchants and loan sharks who have hundreds of thousands of gold would have the guards on the payroll...
 
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@Talisman let me summarize where I think the discussion is at at the key issues, so we can figure out what to do.

Issue 1) Rate loan shark offers to the player for investing money

A) current amount: up to 11% per month depending on skill

B) Hylier Pistof's 2014 observation: should be reduced to something that is no more than 3% per month ("tops" so he was just setting a ceiling, not suggesting a particular number)

C) Tingyun's suggestion: 1% per month

D) Talisman's observation regarding realistic rate: something like 0.2% or 0.25% per month.

I personally favor C both for ease of not using fractional rates, and for gameplay purposes (making the money still feel like something in the shortened timeframe of the game, while not overwhelming active pirating profits). It is more realistic than current rates (especially in avoiding the truly loan shark offering higher rates for player investment than his own lending rates, which is the truly absurd situation).

However, it is indeed a sacrifice of some realism for gameplay, given the historical data Talisman cites.



Issue 2) Rates the loan shark charges:

Current is 11 - player commerce skill. Meaning, starts at 10% per month, and drops to 1%.

@Talisman you and I agree on: rather than player commerce skill, the primary determination should be player riskiness as an investment. Talisman suggests reputation, I suggest adding fame and player personal wealth to the mix as well.

Gameplay benefit is all of those could use some additional effects.

Issue to be discussed: what should the range be that he new formula operates on? I favor the original 10% to 1% per month, very high at the beginning (because a beginning player wanting money for a ship is risky, and with the money from a lender the player can make a large cargo profit. Lender is essentially an investor in a risky fledgling shipping business, and true "loan shark" rates seem justifiable).

At the end, it reaches 1%, which is a bit odd (having it get all the way down to the same rate as the investing), but it avoids the truly weird notion of having it get below, and reflects the idea of the player as a very safe investment at that point, perhaps similar to the loan shark himself. Also seems to reflect Talisman's observations of the kind of rate a (reasonably secure) shipping business would be charged.

However, if you think we should change the range Talisman, I am certainly open to the idea. If we did keep the original range, I think the 10% per month would be the sort of thing only horrible reputation dirt poor players should be charged.



Additional Issue 3) as long as we are discussing this Talisman, want to draw your attention to and get your insights on the other salient financial issue with the lending.

Maximum loan amount. Currently, it goes up linearly with player level, nothing else affecting it.

This seems an almost ok proxy for riskiness (higher level players presumably have better stuff, and are better investments) and works well for game balance. However, we could add on the same factors of reputation, fame, personal wealth, etc, perhaps leaving level in place alongside them.


Hopefully this helps organize the discussion. I look forward to your insights Talisman, really interesting and helpful that you looked up the Bank of England details for the time. :)
 
@Talisman just in the rather likely event I disappear back to working nonstop for awhile after today (took something of a break today), if you decide to work on the formulas all are in PROGRAM/dialogs folder in the dialogue file called "usurer" or something like that. :)
 
Here's the most moderate version of the proposed fixes: nothing altered except player investment interest rate, which is set to the 1% per month/12% a year value.

Virtue of fixing the worst problem while not changing almost anything, so very safe at least.

But if @Talisman or someone else wanted to write and test a more extensive implementation of the other ideas, maybe that would be better long term. Whatever people decide. :)
 

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