I want to lend money: Tell me how

Oran A. Hall, Contributor

QUESTION: This is my second letter to you for advice. The first one was really helpful and I must say thanks. Well, I need you to help me with this one like before. How can I get started by lending money to people - setting up a lending agency for payday loans and offering small loans? I find myself with J$1.5 million and I was wondering how I could give small loans to people for short periods like 30 to 60 days.

- Douglas

PFA: Moneylending is a risky but potentially profitable business which should be entered into with great care, especially in times like these when the economy is weak and many persons are under severe financial pressure.

Those who borrow from same- day loan companies usually do not have access to mainstream financial institutions such as commercial banks and credit unions because they tend not to have a credit history or assets which would qualify as good collateral.

They tend to borrow to bridge cash shortfalls for personal uses like insuring or repairing a car or home, family emergencies, school fees and other educational expenses, debt consolidation, medical expenses, vacation, and funeral expenses. As collateral, they offer their homes, cars, appliances, land, and furniture.

Moneylending practices

The practices of moneylending businesses tend to vary. Whereas some require collateral, there are others that do not. Some compute interest on an add-on basis, but others compute it on the reducing balance. Some facilitate loan repayment by salary deduction from 'approved' employers, but where this is not facilitated by employers, payment may be facilitated through designated commercial banks if salaries are credited to accounts held with them.

The loan-application process is generally not as demanding as it is in the mainstream financial institutions, so this naturally leads to questions about the character of the borrower and quality of the collateral. There are instances, though, where borrowers are required to supply enough information to give the lender adequate comfort about their character.

Requirements include job letter, TRN, photo identification, payslips (for three months), proof of address, and passport-size photographs. In some instances, borrowers may be required to be employed with their current employer for a minimum period. Where a guarantor is required, there are similar requirements for the guarantor. Some of these lenders are linked to, or are themselves, well-established businesses.

Although their fees are generally lower than those of the mainstream lenders, there may be non-interest charges, including late charges and penalties. Although the process may be relatively quick, the promised one-day disbursement is sometimes not realised, and information relating to the terms, costs, and amounts that may be borrowed is not always readily available.

Borrowers tend to require relatively small sums for short periods. This effectively increases the cost of doing business because of the higher level of administrative support required to manage a portfolio that may not be very large, but which may have many accounts.

High demand

From the above, you can see that there is much risk inherent in this type of business, but there is generally a high level of demand for such loans. Moneylenders are often criticised for the high effective rates that they charge. These high rates are due primarily to the high level of risk to which these lenders are exposed.

Before you venture into the moneylending business, there are several things you should consider: What are the risks? What will you do with the collateral if a loan goes bad? Are you temperamentally suited for this kind of business? Do you have the required skills and capital? Do you have access to the required administrative support? Are you familiar with the regulatory requirements for this type of business?

You would be well advised to set up and register a formal business that is adequately capitalised. Consult the Companies Office of Jamaica for guidance on incorporating a business.

The moneylending business you have in mind is governed by the Moneylending Act which spells out the required conduct of such businesses, forms of contracts that are enforceable, the make-up of documents related to each transaction, treatment of loans in default, and legal recourse available to borrowers regarding excessive interest rates.

For details of The Moneylending Act, see the website of the Ministry of Justice, www.moj.gov.jm, under the section, Laws of Jamaica.

Moneylending is serious business.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com