How Do Lending Companies Make Money

How lending companies make profit

Introduction

The art of lending or financing has been around since the beginning of civilization itself. Many ages ago, farmers used their grains and seeds to borrow capital and also used livestock as a repayment option.

That was the genesis of the lending system that has advanced to become the giant financial structures we know now.

What is Lending?

It means giving out money or property to another individual with the expectation that it will be repaid in the future. In a financial context, lending includes different kinds of commercial loans.

Who is a Lender?

Lenders are f i nancial institutions who are in the business of giving out loans. While individuals can also be called lenders, their reason for lending may differ from that of a financial institution who are out for gain.

When a friend lends you money, they may not be necessarily looking to make profit for themselves; they just want to help out, but that cannot be said of financial institutions such as banks and credit unions.

These institutions expect not only to be reimbursed. They also expect to be paid with interest; which is the reason for this article.

Different Types of Lenders

Traditionally, lenders are often referred to as banks, cooperative societies, credit unions and any other form of financial institutions. In reality, lenders have expanded beyond the scope of banks and other financial institutions.

They are referred to as less traditional sources of funds for personal or small business loans — and they include:

Family and Friends — Here, someone you already know very well can assist you and help you out of a tight financial situation. This could be any member of your family or your friends. However, no matter how close you are, you should draw up a loan agreement when taking the loan.
You can also borrow money from yourself — This is common to lending into your own business. All it takes is the required discipline to treat yourself as a separate entity from your company. This will encourage you to repay when due.
Peer to peer lenders — these are sources of finance you get by association. Like club or association lenders. They are not established to grant members loan. However, they could lend a hand to a member in need
Crowdfunding — it involves raising a small amount of cash from many people. The best thing about crowdfunding is it doesn't require an interest payment

How do Lenders make money?

It's pretty straightforward. Mortgage brokers, banks and credit unions make their profit from the interest they charge on your loan offer. This is referred to as the cost of a loan. As lending money can be a risky business, these lenders charge an interest rate depending on the risk involved. The higher the risk of not paying, the higher their interest rates.

Think about it — While lenders may seem like the villains, they are vital to the development of the economy. For example, When You go to request a bank to request a rent loan, the bank takes funds from their depositor (savings and money market accounts) and offers you the credit; at a higher rate

The loan enables you to pay your rent. The landlord now has more money to pay his staff. The employees of the landlord now have money to circulate to businesses. Other businesses, in turn, grow the economy.