Making and Servicing Loans

Buying existing loans is a popular way to invest in loans without all the paperwork and screening that comes with loan origination. Many lenders work closely with a business that originates loans, cherry picking their favorite loans from the loans the business is looking to sell. Most commonly, I’ve seen this with car dealerships, but it’s also very common with mortgages, personal loans, construction loans, and many other types of loans. If you are considering purchasing existing loans here is some information to help you get started. Purchase price isn’t necessarily the principal balance on the loan. The loan may have a face value of $4000, but you might buy the loan for $3000 or $4500, depending on various circumstances.  Most commonly, a loan will be priced higher if the rate on the loan is higher than the current industry rates.  You might pay $4500 for that $4000 loan if it’s at an interest rate of 12% where currently, an equivalent borrower would be able to get a loan at 8

Of all the lenders I’ve talked to who use my loan servicing software (Moneylender Professional) , there are three underlying financial structures they typically use for lending money.  I’ve personally done a few loans that were internally financed and a couple that were investor financed.  There are advantages and disadvantages to each. Internally Funded Lending The simplest system for a lender is to loan money that the lender has on hand.  “I have $10,000 in my bank account, I’ll give it to you and you pay it back with interest.”  The main advantage is that you can control everything.  There’s no one to be accountable to except yourself (and the government, of course). If the borrower defaults, files bankruptcy or just refuses to pay you may be forced to write off the loan as an uncollectable debt.  The money you loaned out is off earning you interest and as it trickles back in, you’ll be able to make new loans with the principal and interest but it’s going to take a whil

Note, this article is talking about lending in the United States of America. If you are located in another country, the rules may be totally different (or nonexistent). Investing in loans can be a very profitable and effective business. State and Federal laws affect what a lender legally can and can’t do, and licensing fees may apply in a variety of situations. Here are some pointers to help get you started on the road to profit. Banker’s Licenses, Lender’s Licenses and Exempt Lending The licensing fees to become a lender can be pretty steep, especially for a small lender. Many states require any business that advertises itself as a lending business have a license as a lender. Payday loan companies, mortgage lenders , and personal loan companies will usually have to obtain a license to make loans in any state where they do business. The fees and bonds required that I’ve seen are usually around $10,000 annually for a banker’s license and around $2,500 for a regular lender’s