How to Loan Money for Profit

By Eric Hammer

Most of us don't tend to think much about how to loan money. Instead, we focus on how to borrow money or save money. However, knowing how to loan money can be a very profitable thing to do and can also save you from tremendous heartache when dealing with friends or family whom you choose to loan money to.

The first thing to know about how to loan money is that you need to understand that there are three distinct ways in which ordinary people can loan money and turn a profit from it. While bankers will loan out money that doesn't belong to them (either by borrowing from the Federal Reserve system or by loaning money that people deposit into savings accounts and the like), for most of us, loaning money means taking cash out of our pockets and loaning it to someone else.

How you loan that money however depends on the kind of loan you are making. It is possible for example to loan money for profit through various social lending sites such as Prosper.com and Lending Club. In this case, you don't really need to know much about how to loan money. The sites evaluate people who want loans and provide you with a risk index to let you know how likely they are to pay back the loans that they take out.

However, it is also possible to loan money to friends or family and it is possible to loan money as a form of charity. We'll get to both of these in a moment as in both cases, it's more important to understand how to loan money without losing your shirt.

How Much Can You Make?

Most social lending sites will provide interest rates in the range of 12% for loans made through their services. However, there is a risk of the person you loan money to defaulting on the loan and not paying it back, meaning that you have to be relatively careful about whom you choose to loan money to.

Ways to Make More | Related Opportunities | Tips

As noted above, the most popular way to make money from loans is to use social lending sites which connect strangers together to provide loans with decent rates of return for the lender and better rates than the borrower could get from a bank (if they can get a loan at all). In this case, it's mostly a matter of following the guidelines on the site to learn about risks in order to decide on whether to make a loan to others.

However, for those who want to know how to loan money to friends or for charity purposes, things can get a bit more complicated. Too often, such loans are informal arrangements where you loan out a small amount of money to a friend or family member in distress. In these cases, it's important to consider the money as something you can afford to lose if they don't pay you back. Otherwise, you could easily tear apart a family relationship over a relatively small sum of cash.

However, when you loan more than you can afford to lose, it's important to treat it purely as a business transaction. It is not at all inappropriate to draw up a contract which includes a repayment schedule and interest rates. By keeping it at this level, you remind your potential borrower that you fully expect to be paid back and that defaulting on the loan is not going to be an option for them.

It is also possible to loan money as a form of charity. This can be done in several ways. In some cases, you could find out how to loan money through your church, synagogue or other charitable institution. Often, these organizations arrange for low interest loans to help out the poorest members of the community. Keep in mind however that the amount you may earn could be quite minimal if you earn anything at all.

Another possibility is to loan money through companies such as MicroPlace. MicroPlace and other companies like it arrange for micro loans to people in very poor parts of the world.

Traditionally, the loans will carry low interest rates, around 2-5% and they are not always paid back, meaning that you should think of these things as being charity rather than investments (though for a legal standpoint, they are investments, meaning you can't write it off on your taxes unless you happen to lose money).

Qualifications / Requirements

There are no qualifications whatsoever to learn how to loan money except that you need to have the money available to loan out to begin with.

First Steps

Start by deciding that you want to loan money and then decide on your options. If it's a loan to a friend or family member, discuss repayment terms and interest rates with them. If the loan is through a site like Prosper.com, be sure to thoroughly read their disclaimers so that you understand the risks involved in making a loan on such a website.

Resources

Check out these helpful resources to learn more about how to loan money for profit:

The Street: Lend Your Money to Turn a Profit - This is a good introduction to the concept of social lending sites, which allow you to loan money to strangers in need of cash. It will not however teach you how to loan money. For that, be sure to read the information on the sites the article refers to.

Credit.com: The Best Ways to Loan Money to Friends and Family - This article provides some very useful information on how to loan money to friends and family.

New York Times: Doing Good by Paying Forward -This article describes the phenomenon of micro lending and how to loan money through organizations such as Kiva and MicroPlace. It is worth noting however that only MicroPlace actually allows you to make a profit from your money.


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