Making Unsecured Loans for (Reasonably) Safe Profit

I had a phone call with a potential customer the other day.  They were looking for some software to manage their loans as they start a relatively new lending business.  After finding out more about the type of loans they planned to make, the typical amounts, repayment timelines, etc. I confirmed that Moneylender Professional would be more than adequate to handle the task.  Our conversation moved onto the business of making loans well.

This lender asked how to make sure the loans get repaid when the debt is unsecured.  How do you decide who will get your money to make sure that you always get paid back?  We talked about it for quite some time, and we came up with a few key ideas to answer this question.

Is the need for the loan prudent?

First, is the borrower trying to pay routine bills, or is the loan for something unexpected and urgent?  If the borrower is just restructuring debt, that’s probably a job left for banks or credit cards.  Paying utilities or rent?  These are signs the borrower isn’t able to keep up with their existing bills.  The likelihood you will be able to get timely repayment of your loan without a fight is low.

Is the reason for the loan an unexpected, one-time expense?  Car trouble that requires immediate repairs, medical bills from an unexpected event, needing money to help a family member out of a bad situation, the purchase of an expensive thing; these are things that aren’t already a drain on someone’s income and might potentially require more cash than the borrower has on-hand.  If so, this is a reasonable time that a person might reach out for financial help from a lender.

Can this person repay their loan?

Does the borrower have income?  If not, how will you get your money back?  Is it enough that they can pay their regular expenses like housing, food, utilities and car payments with a little left over for fun?  Is there still money left in their budget to pay your loan?  Ask the borrower to list all their monthly bills, or better yet, give them this worksheet to list out their expenses and income.

Has the applicant been at their job for a long time?  Were they just hired?  Fired?  If the borrower’s work situation is tenuous, will you be able to get your money back if they lose their job?

Are you the right lender for their loan?

Different countries and states have different rules for collecting.  The State of Georgia in the USA will fine anyone that contacts one of their residents in an attempt to collect a debt unless the collector is licensed by the State of Georgia to do so.  It’s a very hefty fine, too.  If the applicant is from somewhere far away, and you are not usually in the business of loaning money in their location, are you really the right person to be giving them a loan?  Will it be easier for this applicant to ignore you or deprioritize your payments because of your distance?  Should this applicant be contacting someone local instead of reaching out to a lender that is far away?

Are they asking for an amount of money that you are comfortable lending?  Making a loan that is much bigger than your other loans might put you in a position where the performance of that one loan dictates the overall performance of your business.  Will you be put in a difficult position if this borrower does not perform on your agreement?

Say No!!!

If you have concerns about a loan, anything at all that tells you this loan is riskier than you would like, don’t let greed cloud your judgement.  The promise of big profits on a loan with someone is a hollow one if you will end up losing your principal.  We all know that lending money means taking a risk that the borrower will fail you and you’ll have to really fight to get your money back.  Even then you’re still not guaranteed to ever recover your money.

When someone asks you for money, you have to decide if this applicant is a good investment.  You have to balance the pain of losing your money with the pain of missing out on a profitable loan.  If you’re not very confident that the loan will be paid back, don’t give that person your money.  There are other lenders that might say yes to them.  You are not obligated to give your money to someone who seems untrustworthy or irresponsible just because they asked you for it.

Be Patient!

Having idle money might feel wasteful when it could be invested and earning a profit.  If you rush to invest all your cash in loans quickly, you might miss out on better opportunities that come along.  If you make a barrage of new loans and then have to wait for repayment to make another barrage of new loans, you may find yourself in a binge-and-purge marketing cycle of advertising your available money and then not having funds, and when you have the funds you'll have to restart the advertising again.

Be willing to grow slowly.  You will have some bad debts along the way.  Better to spread them out so they don’t all happen at once, and to learn from them so you don’t make the same mistake multiple times.  Declining applications that just don’t quite measure up is a skill, and you should expect it will take some time to get the hang of it.

Say Yes!!

When an applicant asks for money, and it ticks all the boxes, trust your judgement.  Approve the loan, send your funds to your new borrower.  Enjoy your well-made loan.  There are plenty of valid reasons a person might need money unexpectedly but could make payments over time.  When one of those situations is starting you in the face, and the borrower is honest and qualified, give them your money. 

If you did make a mistake, it won’t be one you can’t afford because you didn’t lend beyond your comfort level.  Sometimes times are tough even for good borrowers, and you might not see perfect performance.  No one can predict the future.  But you can capitalize on it with late fees!

I hope this information is helpful to anyone that’s getting started.  If you’re becoming a lender, buy a copy of my software to manage your loans.  It’s easy to use, full of all the features you’ll need over the years as every random thing that can happen does happen, and it is extremely affordable.

Get Organized with Loan Servicing Software

Many people end up with a loan and think that it’s totally manageable to do the math themselves and keep track of it all in Excel.  For a while, things are going pretty smoothly.  Annual tax season comes around and the crunch to figure out what numbers to report to the IRS and your borrower, and after a little digging, we get some numbers that look right.  For a time, things are great.

Then the borrower want’s a payoff quote, or needs to show a recent statement to someone, or they start missing payments and catching up, or the late fees are getting lost because there isn’t an easy way to stay on top of them.  The numbers for the IRS are harder to dig up.  Maybe the borrower files bankruptcy and the court needs detailed documentation, or you have to foreclose and more documentation is required.  Maybe there’s a dispute, or an adjustment, or some other change that starts to break the consistency of the formulas in Excel.

That’s when you need loan servicing software.  Good loan servicing software will handle the calculations for the whole loan automatically.  You’ll be able to plug in the basic parameters of your loan and the software takes over with the math and accounting.  Changes, statements, payoff quotes, tax forms, everything is at your fingertips when you have the right software.

As the creator of Moneylender Professional, this is a story I’ve seen unfold over and over again.  If you’re looking at your loans in some unwieldy format and feeling overwhelmed, now is the perfect time to get a copy of Moneylender.  Make servicing your loans simple, quick and accurate with Moneylender Professional.