How to make money with personal loans

Most people are familiar with getting loans, whether it is for a vehicle loan, student loan, or a mortgage. However, getting loans is a good way to spend more money, not make more money. The obvious reason is that you need to repay the principle of the loan plus interest. So how can you make money with personal loans?

Write loans instead of receiving them

The way to make money with personal loans is to issue them to people. This is an unconventional, but lucrative way to make some money. After all, this is how banks make their vast amounts of money, why shouldn’t you be able to do the same thing

True personal loans

You can, of course, loan money to a close friend or relative if you know they need money. First, you won’t have to worry about lending to a stranger, and you can be fairly sure they can pay back the money. But beware! You never know when someone could be hit by a bus or die by some other unpredictable event. If this were to happen, you could potentially lose all the outstanding debt on the loan. Another thing to watch out for is if your friend or family member can’t pay back the loan, or refuses to pay the loan back. If this were to happen, is it really worth losing a friend or family member over something as silly as a loan? The risk of true personal loans is just too high, and unless you are absolutely sure the money will be repaid, you should avoid making this type of loan.

Loaning to strangers in need

This is an exotic investment idea that has gained substantial traction over the last few years.  Of course, you can’t just go up to random strangers on the street and offer them money. There are two main websites investors use today to make high interest loans to strangers. These two sites are Lending Club and Prosper. The idea is simple. People need to take out loans. There are a variety of reasons, but most of the loans on these sites are for credit card debt consolidation. People use Lending Club (or LC) or Prosper to apply for a loan. You, as an investor, can use these sites to fund other people’s loans.

The details to investing with Lending Club or Prosper

On LC, all loans are chopped up into 25 dollar increments. So if you have 1000 to invest, you could buy portions of up to 40 different loans. This means that if one or two people can’t repay the loan, you can still make a profit from all the other loans issued.  Diversification does provide some protection from risk, but this investment technique is not for everyone. You should have a moderate tolerance for risk. What do you get for the risk? The answer is high average returns. Even debt consolidation loans are issued at rates over 10% APR, which means that investing by funding loans can end up being more profitable then high dividend paying stocks!

Social responsibility

A high return investment that is also a socially responsible investment is a rare thing indeed, but that’s exactly what we have here. The people requesting loans through Lending Club or Prosper need the money. Most of the loans are for debt consolidation from even higher interest rate credit cards. By choosing to invest in their loans, not only are you making a double-digit annual return, you are helping someone make lower payments that go to you and other regular people instead of major banks and credit card companies. You can sleep soundly knowing that you’re making a good return and making the world a better place at the same time.

17. July 2012 by admin
Categories: Investing, Loans | Tags: , , , , , , | Comments Off