You may be motivated, if not tempted to lend money to people, at least whom you know closely, thinking if banks can lend money, then why you cannot. It is your deposits that the banks lent out and earn high profits paying you just a paltry amount annually. True. But there are a few other facts to know as well.
You must have seen in the movies especially of the olden days and also read on the newspapers how unscrupulous money lenders harass and torment the borrowers charging them exorbitant rates of interest and setting absurd terms and conditions. On the other hand, even the borrowers posed enough threat to the money lending business when they fail to make the repayments. Therefore, money lending business is not devoid of risks, and it is for both the money lenders as well as the borrowers.
The risks are still predominant, and it will not be an iota of exaggeration if it is said that it is even higher now given the fact that accessibility to loans and its approval is much more liberal, flexible and easier than the olden times. In the olden days, loans were usually given to known businessmen only, but now even a common person and a stranger to the money lender can apply for a loan and receive it as well. Therefore, the risk factor now is even more intense.
Formal financial systems of today
It is the flexible and liberal lending policy followed by the formal financial systems of today that have resulted in reducing the role of money lenders in the modern world. However, surprisingly and to some extent beneficially especially for the poor borrowers, the money lenders have found alternative ways to lend money informally. This has raised the level of competition between the formal as well as the informal financial systems of this modern world where each wants to survive and surpass the other in terms of business and functionality.
The effect of such coexistence can be enumerated as under:
- Loans are now easy to avail from different sources
- There are multiple types of loans available
- The cost of borrowing is different and varied and
- Alternate moneylenders continue to charge high rates of interest than formal ones.
That means, there is an ample chance to make supernormal profits in money lending which may act as the most enticing factor for you to try out your hand at it.
Facts to know
To make sure that you do not burn your fingers and pocket you will have to follow a few basic principles and know a few facts if you want to make the most out of this most lucrative business.
- The formal financial systems of modern times include banks and NBFCs. They have the primary control over the money market and have successfully made a dent to this lucrative profession of money lending especially by the informal money lenders. Their lending policies have compelled the informal money lenders to bring their rates of interest on loans down. However, these institutes along with the informal ones still make handsome money by giving out loans to different borrowers.
- All these financial institutions and money lenders come under heavy regulation so as to ensure entities are not after making super normal profits in whatsoever ways and means possible. It has also resulted in the rise of different private money lenders that are equally reliable and helpful in the times of need for the borrowers. Search on the internet, and you will find a large number of such websites like https://www.libertylending.com/ and others.
- The reason for the rise in demand for alternative sources for loans by the borrowers is the need for credit to maintain even the basic standard of living in this modern economy. It is the gap between the rich and the poor that has made the developing and underdeveloped countries a credit starving nation. This has given rise to private money lenders who can operate outside the formal money lending structure and continue to flourish.
- Therefore, it is the short supply of fund that will allow you to find borrowers easily who will be willing to pay a couple of percent more to borrow money from you. In most of the cases, these borrowers come from the weaker sections of the society and are more often than not victimized by the formal financial systems and their lending policy. Make sure that you make the most of their deprivation of funds but at the same time make sure that neither you nor the borrower is victimized further.
- Expand your business as much as possible and affordable to you and do not get enticed by the fact that business in this modern time has crossed borders. Know your limits and resources, the financial structure and your ability to continue to thrive in this competitive business segment.
- Make sure that you stick to lending money to an individual rather than a corporate. It is not only more profitable as corporates will usually borrow at a much lower rate than an individual but will also make your money lending safe. It is best to focus on collateral-based personal loans as these are safe and does not require any special skill set. Since a security backs it, the amount you lent out will be generally safe. Make the best use of technology to gather information about the borrower. With a click of a button, you can get in touch with the credit bureaus to know more about the previous loans and the complete credit history of the borrower in minutes.
- Always lend out amounts that you can afford to lose. This way you will not put your own financial well-being at risk. Draw up a payment plan using an online calculator of loan repayment schedule and make your intentions clear. Get everything in writing and deal with problems right away.
If you follow these rules, you can make the best of your disposable income lying idle in your savings account in a bank.