Payday loans have proven themselves to be a great help for those who seek some relief from a salary that has gone short. It gives them a short term loan that can help them bridge financial deficiencies or in cases of emergencies.
That’s the reason why there are many payday loan companies operating. In 2019, Bloomberg reported that the US payday loan industry alone is valued at US$90 billion.
With such a thriving industry, you would be right to think that the payday loan market can represent a possibly lucrative endeavor. After all, a lot of people need cash, and will be willing to take out a loan when they are at a dire financial emergency.
How Do You Invest in Payday Loans?
There are three ways through which you can invest in the payday loan market. First option is to become a creditor yourself and offer to let people borrow money that they can pay off in 7-14 days.
If you find it a hassle or a financial burden to go through the process of incorporating your company, you could contact existing creditors who offer these loans and propose a partnership. In short, you’re going to add your capital to theirs and earn profit from their operations.
The last option is to purchase the creditors’ delinquent loans and take on the collection. To gain back losses, loan providers typically sell off their unpaid loans at a discount and delegate the collection to those who buy the accounts.
Because the loans are bought at less than their actual value, you could earn your money back when you successfully collect on these loans. You can even outsource that to real collection agencies. They will just pay you your due once the obligation is settled.
Pros and Cons
As an investor, it’s always best to weigh your options. Just like any form of investment, putting money into the payday loan industry has its own advantages and disadvantages.
The industry is very lucrative. If you invest directly into a payday loan company or incorporate your own, you could earn money from the high interest rates that you could charge borrowers of this short-term loan.
You could your outsource customer service to offshore companies that offer lower labor rates as well. Much of the nitty gritty of managing a financial company don’t have to fall on your shoulders.
However, there are considerable risks as well. The biggest one is the possibility of delinquency. There are many instances where people take out a loan that they actually cannot afford to pay, and they end up not being able to pay off the debts.
One way to mitigate this risk, however, is to be always open to restructuring. You might want to provide options for your borrowers to settle their debts if they are unable to settle through the original terms. However, this can lower your profit margin.
The lucrative nature of the industry can make it tempting for investors like you to try and earn from that market. It can be your key to success, but you’d have to plan carefully before you make your entry. Also, be sure to play with money you can afford to lose.
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