How to use loan to make money? Today, thinking about what to post on this blog I got the idea to look at the search query: “i’ll give you 1000” at google.com and bing.com. What were the results? Got a lot of requests like “borrow me $ 800, and I will pay you $ 1,000 back after a month.” Or other like “I’ll give away a car for $ 1,000” or “I’ll give you 1000 if you open the towel”. What interested me, however, it is a case of the first query and probably the most common, that is, a fast private loan in exchange for a percentage.
Not surprisingly, the loan companies grow like mushrooms after the rain. Many people are in need, and have to pay off loans or need to ask for another loan from bystanders of online forums. I omit here completely the question of whether these are actually people in need or some con artists who borrow and not give money back. Certainly, borrowing without signing any contract, is not the best practice, even if it’s lent to someone of your family. But let’s do some calculations. There are, as you can see, those who in their desperation are willing to pay a significant percentage of a short period loan amount.
Using Loan to Make Money? Suppose, then, that the loan is $ 800, a month after the borrower has to give back $ 1000. Interest on the loan of this amount is $ 200, so the effective interest rate is 300%. Incredible, considering the fact that banks now offer interest rates on deposits of up to 4%. What if the borrower had to pay $ 1,000 after 3 months? The effective interest rate would still be huge, because it would amount to 100% per annum. If the lender agreed that this sum will be repaid after a year, the effective interest rate of 25% would be still several times higher than the best CDs offer right now. In the same annual period, by investing $ 1000 in the 5% CD you’d make just about $ 40.
How do banks make money on loans?
Let’s look at the loans that are granted by banks. The loan amount of $ 100.000 for 5 years with an effective interest rate of 25% means that we have to pay the bank $ 225.000. Bank earns a net money of $ 125.000. If the repayment of the loan, while keeping interest rates at the same height, would be spread over 10 years the bank would earn $ 250.000, and the borrower would have to repay $ 350.000. Of course, the longer the repayment of the loan, the lower the effective interest rate, which was not taken into account here. Anyway, more profitable, is to pay off loans as soon as possible.
Now do you still wonder how much money banks make, and how little interest rate they offer on deposits or savings accounts? Another thing is that the bank doesn’t need to have in its “treasury” or on its accounts the sums of money they lend. It may be several tens of times less, and the lent money is created in a computer system and transfered from one account to another, in other bank. This is called money creation, but this issue requires a broader explanation in a separate article. For small amounts of cash loans, the bank or the lender actually lend physical money, which they have in their possession.
As a private lender you can use loan to make money easily. First you may try to make money with micro loans.
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