Side gig - Cash lending?

[max9505672]

Hey!

I am wondering if any people here have ever considered lending small amounts of money to individuals (family or other) as a side gig?

It seems like there are quite a few opportunities either with family members and there are also many classified adds from people looking for small short or mid term loans from another individual.

I don't know if it's the same everywhere, but where I am from, some small companies will lend to money between 27% and 32%/year, which is already quite high, and on top of that they usually charge some king a management fees. Basically, a 1500$ loan can quickly become close to 2500$ to 3000$ which is crazy.

What if I could lend this person the 1500$ with a lower interest rate? This could be interesting for both parties. Of course, that would include a contract and a meeting with the person to make sure this a trustable person.

Even then, I know there's a risk the person wouldn't pay and I'd have to prosecute the person in order to eventually get the money (which would probably cost more than the gained interest rate). I just think if you can find the right person, in the right situation, why not?

Any people here have ever done this or have comments?

*Obviously, the typically low amount of money asked would result in low interest gains, so someone with a big 'stache, the risk and work associated wouldn't be interesting. I am asking for someone beginning its MMM journey.

[PoutineLover]

There are plenty of examples in the forum of why lending money to friends and family ruins relationships. People who don't qualify for traditional loans are credit risks, and that's why payday places charge such high interest. I wouldn't do it if I couldn't afford to lose the money. There are certain companies that do peer to peer lending though, those seem slightly safer.

[max9505672]

There are certain companies that do peer to peer lending though, those seem slightly safer.

Never heard of those companies. How do they work? Would they insure the payments? Would they assume  part of the risk?

[Jaayse]

I personally do not like the risk associated or how long it takes to get out of the investment, but Lending Club is a commonly mentioned firm for this kind of thing.  MMM did an experiment with Lending Club that he documented in his blog. 

https://www.lendingclub.com/investing/alternative-assets/how-it-works

http://www.mrmoneymustache.com/the-lending-club-experiment/

Good luck with whatever you decide!

[RWD]

This is very high risk and not worth the hassle for small amounts anyway. The P2P lending platforms like Lending Club help spread out your risk, but they are still risky and can overly complicate your taxes for the gains. I invested in Prosper loans in 2007 and averaged a -10% return (lost ~$2k)...

If you want to lend money reasonably then you should look into hard money loans with collateral. I've done a couple loans with real estate as collateral and when set up right (lawyer going over paperwork, first trust position on deed, property value assessment, etc.) your risk is very low. My interest rates were around 11% for these. The downside is that the amounts are going to be an order of magnitude more than what you're talking about, think $20k-200k. And you have to wait for a loan to be available so that's a lot of unproductive cash sitting around between investments.

It was an interesting experiment but I've switched entirely to index funds for my investments.

[Syonyk]

I am wondering if any people here have ever considered lending small amounts of money to individuals (family or other) as a side gig?

Certainly!  Loan someone you don't like $50 and you'll never see them again! :)

Otherwise, no, you aren't a better judge of character than banks and loan places.  If a bank won't lend to someone, why would I?

[max9505672]

I personally do not like the risk associated or how long it takes to get out of the investment, but Lending Club is a commonly mentioned firm for this kind of thing.  MMM did an experiment with Lending Club that he documented in his blog. 

https://www.lendingclub.com/investing/alternative-assets/how-it-works

http://www.mrmoneymustache.com/the-lending-club-experiment/

Good luck with whatever you decide!

I've heard about lending club, however they don't do business where I live.

[max9505672]

Otherwise, no, you aren't a better judge of character than banks and loan places.  If a bank won't lend to someone, why would I?

I feel like banks and loan places have ''stardard''/same for everybody rates and fees statistically based on the probabilities people are not going to pay back. I don't think they take the time to sit down with everybody, listen to them, try to see how trustable they are, etc.

Basically, I think that I could take advantage of getting the ''human feel'' of somebody as opposed to what banks do. It might be delusional, but I feel like if I can find the right person, with a trustable situation (proof of regular income, capacity to payback, temporary bad luck), a signed contract, etc., it could work.

For sure though, I know that if someone doesn't have, let's say, 1500$ available as an emergency fund, it's probably not someone with good financial habits. What would happen in case of another ''bad luck''? Would I be the first not to get paid? Probably.

It's tempting, but there are so many ''if's''

[Syonyk]

I feel like banks and loan places have ''stardard''/same for everybody rates and fees statistically based on the probabilities people are not going to pay back. I don't think they take the time to sit down with everybody, listen to them, try to see how trustable they are, etc.

Yeah, they do, and they've evolved these systems over at least half a century of data, if not longer.

If "sitting down to talk to everyone, listen to them, see how trustable (how good they are at manipulating bank officers) they are" worked and was reliable, they'd likely use it.

Basically, I think that I could take advantage of getting the ''human feel'' of somebody as opposed to what banks do. It might be delusional, but I feel like if I can find the right person, with a trustable situation (proof of regular income, capacity to payback, temporary bad luck), a signed contract, etc., it could work.

It could work.

It's far more likely to end with you not getting paid back and someone suddenly not answering phone calls, and having moved somewhere.  The good news is that collections agencies will buy the debt from you at pennies on the dollar!

Payday lenders and such aren't as obscenely profitable as people think, simply because a lot of people default on the loans.

I think it's an epically bad idea, if this isn't obvious.  If you disagree, then, sure, go for it.  Please report back how it goes.

[max9505672]

Yeah, they do, and they've evolved these systems over at least half a century of data, if not longer.

If "sitting down to talk to everyone, listen to them, see how trustable (how good they are at manipulating bank officers) they are" worked and was reliable, they'd likely use it.

Good point.

It could work.

It's far more likely to end with you not getting paid back and someone suddenly not answering phone calls, and having moved somewhere.  The good news is that collections agencies will buy the debt from you at pennies on the dollar!

Payday lenders and such aren't as obscenely profitable as people think, simply because a lot of people default on the loans.

I think it's an epically bad idea, if this isn't obvious.  If you disagree, then, sure, go for it.  Please report back how it goes.

I think you convinced me. Might been a little too naive. I know it could work for most cases, but the risks might be too high.

[Retire-Canada]

Basically, I think that I could take advantage of getting the ''human feel'' of somebody as opposed to what banks do. It might be delusional, but I feel like if I can find the right person, with a trustable situation (proof of regular income, capacity to payback, temporary bad luck), a signed contract, etc., it could work.

I think you would be much further ahead in terms of risk, time and return by just investing that money in index funds or getting into rental properties if you want a more time intensive/human contact option.

[max9505672]

Basically, I think that I could take advantage of getting the ''human feel'' of somebody as opposed to what banks do. It might be delusional, but I feel like if I can find the right person, with a trustable situation (proof of regular income, capacity to payback, temporary bad luck), a signed contract, etc., it could work.

I think you would be much further ahead in terms of risk, time and return by just investing that money in index funds or getting into rental properties if you want a more time intensive/human contact option.

Thanks for your opinion. I think you might be right.

For now though, it's not possible for me to get into rental properties. The initial investment between lending money and rental properties is not really comparable.

[Retire-Canada]

For now though, it's not possible for me to get into rental properties. The initial investment between lending money and rental properties is not really comparable.

Fair enough. Index funds are simple and effective with no real minimum investment amount.

[max9505672]

For now though, it's not possible for me to get into rental properties. The initial investment between lending money and rental properties is not really comparable.

Fair enough. Index funds are simple and effective with no real minimum investment amount.

Absolutely! I already have most of my networth (95%) invested in index funds. I was just looking for a side gig with higher RoI potential, representing maximum 2% of my networth.

[Michael in ABQ]

When you consider the delinquency rates experienced by payday/title loan lenders all of the sudden those 300-400% annualized interest rates ($50 fee on a 2-week loan of $500 for example) aren't that unreasonable.

There's a reason places like Propser and Lending Club could get so many customers charging 15-25% interest and why there are various lenders in every other strip mall offering unsecured personal loans at even higher rates. These people are extremely high risk and unless you're talking about thousands of dollars it will cost you more to try and collect the money than it's worth. If someone stiffs you for $300 you could easily spend $100+ in fees just to take them to small claims court. Plus your time and effort in then trying to garnish wages or collect on a judgement.

Lets say you lend 10 people $1,000 and expect to make a $200 profit on each one over a year. You would loan $10,000 and get back $12,000 for a 20% return. Now if just two of those people don't pay up you're out $2,400 (principal and interest) and all of the sudden you took on that risk and spent your time to turn $10,000 into $9,600. A 20% delinquency rate for high-risk borrowers is well within normal limits. If just one of the 10 doesn't pay up your 20% return turns into 8%.

[GuitarStv]

How many big friends do you have, who are willing to break bones?  Because loaning money to deadbeats (the people who will be most interested in the money you have to loan) means you have to collect it.

:P

[max9505672]

When you consider the delinquency rates experienced by payday/title loan lenders all of the sudden those 300-400% annualized interest rates ($50 fee on a 2-week loan of $500 for example) aren't that unreasonable.

There's a reason places like Propser and Lending Club could get so many customers charging 15-25% interest and why there are various lenders in every other strip mall offering unsecured personal loans at even higher rates. These people are extremely high risk and unless you're talking about thousands of dollars it will cost you more to try and collect the money than it's worth. If someone stiffs you for $300 you could easily spend $100+ in fees just to take them to small claims court. Plus your time and effort in then trying to garnish wages or collect on a judgement.

Lets say you lend 10 people $1,000 and expect to make a $200 profit on each one over a year. You would loan $10,000 and get back $12,000 for a 20% return. Now if just two of those people don't pay up you're out $2,400 (principal and interest) and all of the sudden you took on that risk and spent your time to turn $10,000 into $9,600. A 20% delinquency rate for high-risk borrowers is well within normal limits. If just one of the 10 doesn't pay up your 20% return turns into 8%.

I am curious about that 20% delinquency rate, where does it come from?

I like your example, but I think the 20% return is pessimist. I've been in contact with 3 people up to now, the annualized returns rate were : 112% (1.5 month, 500$), 50% (6 months, 1200$), 57% (7 months, 1500$).

[Syonyk]

I've been in contact with 3 people up to now, the annualized returns rate were : 112% (1.5 month, 500$), 50% (6 months, 1200$), 57% (7 months, 1500$).

On paper, or have they actually paid you back yet?

You seem to have a poor understanding of how bad "people who desperately need money" are at paying that money back once they get it.

[max9505672]

I've been in contact with 3 people up to now, the annualized returns rate were : 112% (1.5 month, 500$), 50% (6 months, 1200$), 57% (7 months, 1500$).

On paper, or have they actually paid you back yet?

You seem to have a poor understanding of how bad "people who desperately need money" are at paying that money back once they get it.

On paper. I was referring to %'s of the example above i.e. the 20% delinquency rate and other returns.

I do have a poor understanding of how bad "people who desperately need money" are at paying that money back once they get it, that's why I am here. What's your experience with "people who desperately need money"?

[Syonyk]

What's your experience with "people who desperately need money"?

That you may as well call a "loan" a "gift" for how likely it is to be paid back.  Which is fine, if you go in knowing that and call it a gift.

[surfhb]

You would need to loan based on collateral.    Thats how it works.

Are you prepared to repo your Aunt's car?  ;)

[max9505672]

You would need to loan based on collateral.    Thats how it works.

Are you prepared to repo your Aunt's car?  ;)

How does that legally work? Is it a mather of adding a collateral section to a contract?

[With This Herring]

When you consider the delinquency rates experienced by payday/title loan lenders all of the sudden those 300-400% annualized interest rates ($50 fee on a 2-week loan of $500 for example) aren't that unreasonable.

There's a reason places like Propser and Lending Club could get so many customers charging 15-25% interest and why there are various lenders in every other strip mall offering unsecured personal loans at even higher rates. These people are extremely high risk and unless you're talking about thousands of dollars it will cost you more to try and collect the money than it's worth. If someone stiffs you for $300 you could easily spend $100+ in fees just to take them to small claims court. Plus your time and effort in then trying to garnish wages or collect on a judgement.

Lets say you lend 10 people $1,000 and expect to make a $200 profit on each one over a year. You would loan $10,000 and get back $12,000 for a 20% return. Now if just two of those people don't pay up you're out $2,400 (principal and interest) and all of the sudden you took on that risk and spent your time to turn $10,000 into $9,600. A 20% delinquency rate for high-risk borrowers is well within normal limits. If just one of the 10 doesn't pay up your 20% return turns into 8%.

I am curious about that 20% delinquency rate, where does it come from?

I like your example, but I think the 20% return is pessimist. I've been in contact with 3 people up to now, the annualized returns rate were : 112% (1.5 month, 500$), 50% (6 months, 1200$), 57% (7 months, 1500$).

I liked the example, and I thought the 20% delinquency rate was optimistic!

I don't see you having any success in this unless you are willing to break kneecaps.  I don't think you realize how your family will lash out at you if you try to call in a debt from a family member who had "just some bad luck" one time and keeps having "bad luck."  There are a LOT of people on the forum who have discovered that a loan to family or friends is rarely repaid.

[Michael in ABQ]

When you consider the delinquency rates experienced by payday/title loan lenders all of the sudden those 300-400% annualized interest rates ($50 fee on a 2-week loan of $500 for example) aren't that unreasonable.

There's a reason places like Propser and Lending Club could get so many customers charging 15-25% interest and why there are various lenders in every other strip mall offering unsecured personal loans at even higher rates. These people are extremely high risk and unless you're talking about thousands of dollars it will cost you more to try and collect the money than it's worth. If someone stiffs you for $300 you could easily spend $100+ in fees just to take them to small claims court. Plus your time and effort in then trying to garnish wages or collect on a judgement.

Lets say you lend 10 people $1,000 and expect to make a $200 profit on each one over a year. You would loan $10,000 and get back $12,000 for a 20% return. Now if just two of those people don't pay up you're out $2,400 (principal and interest) and all of the sudden you took on that risk and spent your time to turn $10,000 into $9,600. A 20% delinquency rate for high-risk borrowers is well within normal limits. If just one of the 10 doesn't pay up your 20% return turns into 8%.

I am curious about that 20% delinquency rate, where does it come from?

I like your example, but I think the 20% return is pessimist. I've been in contact with 3 people up to now, the annualized returns rate were : 112% (1.5 month, 500$), 50% (6 months, 1200$), 57% (7 months, 1500$).

LendingClub provides information on their delinquency rates. https://www.lendingclub.com/info/demand-and-credit-profile.action Their highest risk borrowers (Grades F-G) have a charge-off rate of about 26% while slightly better Grade E borrowers are at about 19% all the way up to Grade A borrowers at about 2%.

I recall reading about a company that was attempting to automate underwriting and credit risk for these types of borrowers based on looking at other available information like payment of cell phone bills and other factors that are possible with data mining and the fact that all of our personal information is pretty much for sale. However, that still doesn't mean that someone won't get in an unexpected situation where they can't pay you back and you have little recourse to collect the money unless you want to revert to breaking fingers or try to collect a judgement.

[NoraLenderbee]

What's your experience with "people who desperately need money"?

I used to lend on Prosper, back when it started (2007). I learned that people who desperately need money tend to be desperate for the same reasons:

--They are poor at managing their own money
--They are overextended and think they can fix it by borrowing more
--They are in a major life crisis of some kind (such as divorce)
--They are out of work
--They have been hit with a financial hurricane through no fault of their own (uninsured medical bills, for example)

Only people in the last category have a solid prospect of paying you back. Others may, but they are much riskier.

People who don't manage money well, or are over their heads in debt, will continue their poor financial habits and soon be in trouble again. People getting divorced are liable to end up in a legal wrangle that sucks up every penny and that is far more important to them than paying you back. People without an income simply don't have the ability to pay back, no matter how honest they are. All of them will pay their rent or mortgage first, the electric bill, the food bill, gasoline, etc.,--the survival items--before they pay you.

[max9505672]

Well thanks to everybody, I think it's pretty clear that this was a bad idea.

I would of liked to have input from someone who actually did this, but there's probably a reason why no one does it and the requests are all over.

I'll stick with index funds.

[Pizzabrewer]

My favorite quote in this area comes from Judge Judy:  "Lend money to a friend and you will lose the money, you will lose the friend, and you end up the bad guy".

You need either 1) a forceful, unsympathetic, effective collection strategy or 2) collateral in-hand worth several times the loan amount (this is how pawn shops operate). 

Otherwise you're just asking to be taken.

[brooklynmoney]

How many big friends do you have, who are willing to break bones?  Because loaning money to deadbeats (the people who will be most interested in the money you have to loan) means you have to collect it.

:P

Seriously. This post might as well be called “how do I become a loan shark?” Also you usually need to be regulated to make loans commercially either as a bank or by the state.

[Syonyk]

Seriously. This post might as well be called “how do I become a loan shark?” Also you usually need to be regulated to make loans commercially either as a bank or by the state.

Yah, but, you knows, those "regulatoriated" banks ain't gonna lend to your broke face like my buddy Vinny here.  He'll take care of yous.  But, lemme tell 'ya, when it's time for yous to pay, yous better pay.  Cuz if yous don't, well, den guys like me, see, Vinny sends us out.  And we's gonna get Vinny's money.  And, lemme tell 'ya, the market for arms right now, it ain't so good.  Legs ain't looking good either.  So we might gotta take both, kapish?

[daverobev]

You're in Canada I think Max?

Take a look into Lending Loop.

I would only put a small amount of money in relative to everything else in your portfolio. Fill your TFSA first.

There is a lot of discussion about how the risk vs reward is bad (on both sides; as a lender you are not being rewarded for the risk as the interest you receive is just that - interest; and as a borrower, if your business is sound, you really are paying very high rates - and why would you do that, IF your business is sound?).

I have a small amount with them. So far no real problems, I'm getting just under 14% interest. Worth it more if you are in a low tax bracket!!

[max9505672]

You're in Canada I think Max?

Take a look into Lending Loop.

I would only put a small amount of money in relative to everything else in your portfolio. Fill your TFSA first.

There is a lot of discussion about how the risk vs reward is bad (on both sides; as a lender you are not being rewarded for the risk as the interest you receive is just that - interest; and as a borrower, if your business is sound, you really are paying very high rates - and why would you do that, IF your business is sound?).

I have a small amount with them. So far no real problems, I'm getting just under 14% interest. Worth it more if you are in a low tax bracket!!

Yes, I am in Canada. I looked at Lending Loop a couple months ago, unfortunately, they don't do business in Quebec for a raison I ignore.

My TFSA is filled and I'm on my way to have my RRSP filled too. I am looking at an alternative to put everything else in non-registered account (while still contributing in non-reg. at the same time).

[arob54600]

I work for a credit union. There are a lot of good members that just want to get their money and pay their bills BUT there are also people who would run a scam like you wouldn't believe and lie lie lie. We do work with people and bend over backwards for people, hear them out and help them out (much more so than banks). But best believe that comes with some poking around, credit check, check systems, sometimes collateral, proof of income. and on our more risky loans we specifically write a check to the creditor, not cash. Even still, we have to be careful, we are non for profit, which means we can't gamble our members money away.
It looks like you have already changed your mind away from this idea. But if you change it back, get to know a teller at your financial institution. We see some sad stuff, but most of the time it's just one bad decision turns in to a few bad decisions and the whole house of cards falls down ( and that's not who you want to loan to).

[M2 pilot]

I am wondering if any people here have ever considered lending small amounts of money to individuals (family or other) as a side gig?

Certainly!  Loan someone you don't like $50 and you'll never see them again! :)

Otherwise, no, you aren't a better judge of character than banks and loan places.  If a bank won't lend to someone, why would I?

If that's the case, it'll be one of the best $50 investments you've ever made.

[Syonyk]

If that's the case, it'll be one of the best $50 investments you've ever made.

It does work quite well.

[max9505672]

If it can help or influence some people, here's my experience with lending money.

I have lent to 4 people; 2 where very good payers and I made profit, 1 was a scam and I lost money and the last one is a pain in the *** (I expect to get paid but it's a long and difficult process).

I short, if I had to do it again, I would not. In my opinion and experience, with the stress and management involved, it's not worth it even if at the end I will have made more profit (hopefully the last evetything goes well with the last person) than if I has simply invested that money with my AA.