Create Income – become a bank

Another stream of income that I am building up ready for retirement involves me becoming a bank and lending money to people.

Yes that’s right.  Crazy as it sounds, thanks to the power of the internet, we can all become banks and lend money to people at attractive rates of interest.

The idea is based on an innovative web site called Zopa.com.  The name stands for “Zone of Possible Agreement” which is a fancy way of saying that there are interest rates that are agreeable to lenders of money (me) and borrowers of money (some other person who has registered with Zopa).

You may think that lending to a complete stranger is a foolish thing to do.  What about bad debts?  Will you ever see your money again?

Luckily Zopa takes care of  all this.  For the 1% margin that they take, Zopa undertake strict credit checks on every borrower (using the save credit rating agencies as the big banks).  They also use debt collection agencies to recover bad debts (just like the banks).  For added safety, lenders can chunk their loans up into small parcels of £10 to £20 minimising risk further.

As a lender you can automate the process by defining the type of person that you want to lend to (by credit score).  All repayments of capital and interest can then be automatically re-lent, creating a powerful compounding effect.

My experience is this – I have been lending money now for nine months.  I have set my lending criteria to lend just to A rated borrowers (the least risky).  I currently have 118 individual loans totaling just over £2,000.  Last month my income was just over £12 making the return just over 7% per annum.  Try getting that at a high street bank!  In this time I have suffered no bad debts and no late payments.  The income from the month has already been lent out – so I am making income on my income.

It does have downsides – your money is only accessible as people re-pay their money (36 or 60 months) so this is really only for money that you don’t need access to.

I really like the concept of earning passive income in this way.  it cuts out the huge margins that the banks earn from the public and gives financial power back to the people!

Have a go and let me know what you think.