Interest income is making money from lending money. Making money via interest is largely practiced by banks. With that said, there is nothing stopping us from being the bank. We limit ourselves with our thought processes and outlook. We’ll state will I don’t have millions of dollars. I have news, the local bank isn’t holding that kind of money either. Most banks will have a hard time with a $100,000 withdrawal. Our mindsets must change. The majority of people don’t need millions of dollars at a time. The masses are borrowing 10k-100k. Yes, you can start with even less. There are people who gather capital from multiple investors at 8-15% or more interest rates. $1000 can be the difference between a successful project and a failure. We can be the difference.
How can we be the bank? We become the bank by loaning money with the intent to be paid back with interest. Sure, but to whom? People who need money for unexpected expenses. Individuals looking for assistance in coming up with their out-of-pocket down payment cost. People who are rehabbing homes plan to sell them for profit. Yes, there is risk in all of this. The risk is why we should start a business to do this and not simply start out of our own bank accounts. It is protecting our personal finances. If we take a loss, it is the company loss instead of a personal one. We also should create a process when we provide funds to clients. This step will protect us from taking unnecessary losses. It will also position us to grow a thriving financing company.
How do we determine how much interest we change? The interest rate must be competitive. It does vary based on the use of the funds. Money for a payday loan for a person unable to qualify for a credit card is riskier than money tied to rehabbing a home in a nice neighborhood. Due diligence is required. Protect yourself and your money. When we are starting, we’ll want people to choose our loan. Undercutting competition may be required. If everyone is at 8 or 9%, we’ll need to be at 7%. It looks like a big loss, but it is negligible when talking 1-10k loans. We are talking $10 less on a 1k loan. If that is the cost to get into the business and start a relationship with borrowers, so be it.
How do we determine the people we offer our loans? This question is a tough to answer. It is difficult to tell others how much risk to take with their money. Of course, the more risk you take, the higher the interest rate should become. Yes, the interest rate is higher because the chance of being paid back is low. In the beginning, we should go the slow and steady low-risk route. After we complete a multiple deals, we can set aside some interest income for high-risk, high-reward loans. This way, we don’t lose our entire lending capital in our first couple of deals.
In closing, Interest Income is by far the riskiest income stream, in terms of losing money fast. It is not something someone who’s looking for passive income to choose. It is a stream that requires constant research and time spent watching our money. It is a way to make money but not something a novice should jump into as their first income stream outside of earned income (a job). The funds set aside for this stream should be similar to the funds you’d use to gamble in Vegas or on a shopping spree. If you can’t live with losing it, don’t loan it.
Food for thought. You do the dishes!
