Consumer credit loans have attracted some industry controversy as a financial product.
These loans are short-term, high-interest loans that are typically used by people who need quick cash but don’t have access to traditional forms of credit.
Consumer credit companies, sometimes known known as payday lenders or P2P lenders, have become a popular target for criticism due to some operators high interest rates and undisclosed fees associated with these loans.
Using consumer credit companies for passive income is worthy of discussion however.
However, despite the controversy, investing in consumer credit companies and funds for passive income can be a profitable option for passive investors.
If you’re considering investing in consumer credit companies, it’s important to understand the pros and cons.
In this article, we’ll take a closer look at the payday loan industry and explore the potential benefits and drawbacks of investing in consumer credit loans for passive income.
Understanding the Payday Loan Industry
Payday loans are short-term loans that are typically due on the borrower’s next payday.
These loans are often used by people who need quick cash to cover unexpected expenses, such as car repairs or medical bills.
Payday loans are typically small in size, ranging from a few hundred dollars to a few thousand dollars.
Payday loan companies make money by charging interest and fees on these loans.
The interest rates on payday loans are typically much higher than those on traditional loans, with APRs (annual percentage rates) that can exceed 400%. In addition to interest, payday loan companies may also charge fees for loan origination, late payments, and other services.
The payday loan industry has faced criticism from consumer advocates and regulators due to the high interest rates and fees associated with these loans.
Critics argue that payday loans are predatory and target low-income individuals who are already struggling financially.
They also point out that payday loans can trap borrowers in a cycle of debt, as borrowers often need to take out additional loans to pay off their existing loans.
Despite the controversy, the payday loan industry continues to thrive.
According to a report by the Consumer Financial Protection Bureau (CFPB), payday lenders in the United States generated $9 billion in revenue in 2017.
This revenue was generated from approximately 12 million payday loans.
Pros: Investing in Consumer Credit Loans
Investing in consumer credit loans or payday loans can be a lucrative option for passive investors.
Here are some of the potential benefits of investing in payday loan companies:
- High Yield: Payday loan companies typically offer high yields to investors. A monthly yield is normally around 1% (12% per annum). This is because the interest rates on payday loans are high, which allows payday loan companies to generate significant revenue. As an investor, you can earn a portion of this revenue in the form of interest payments.
- Diversification: Investing in payday loan companies can provide diversification for your investment portfolio. Payday loan companies operate in a different industry than traditional banks and financial institutions, which can help to spread out your investment risk.
- Low Correlation: Payday loan companies may have a low correlation with the broader market. This means that the value of your investment may not be as heavily influenced by fluctuations in the stock market as other investments.
- Resilience: The payday loan industry has proven to be resilient, even during times of economic downturn. During the Great Recession of 2008, for example, many payday loan companies saw increased demand for their services as traditional sources of credit dried up.
Cons: Investing in Consumer Credit Loans
Despite the potential benefits, investing in payday loan companies also comes with some drawbacks.
Here are some of the potential drawbacks of investing in payday loan companies:
- Controversy: The payday loan industry is controversial, and investing in payday loan companies can be seen as supporting a business model that many people view as predatory.
- Regulatory Risk: The payday loan industry is heavily regulated, and changes in regulations can have a significant impact on the industry. For example, the CFPB has proposed rules that would require payday lenders to conduct more thorough affordability checks on borrowers. If these rules are implemented, it could make it harder for payday loan companies to generate revenue and impact the value of your investment.
- Default Risk: Payday loans are considered high-risk loans, and there is always the possibility that borrowers will default on their loans. If this happens, it could impact the revenue and profitability of payday loan companies and the value of your investment.
- Reputation Risk: Investing in payday loan companies could also pose a reputation risk for your personal brand or business. If you’re a socially responsible investor, you may not want to be associated with a business model that is often criticized for taking advantage of vulnerable individuals.
- Uncertainty: The payday loan industry is subject to a great deal of uncertainty. Changes in interest rates, economic conditions, and regulations can all impact the industry and the value of your investment.
Conclusion: Consumer Credit Loans Companies for Passive Income
Investing in consumer credit loans can be a profitable option for passive investors, but it also comes with some potential drawbacks.
Before investing in payday loan companies, it’s important to do your research and understand the risks and rewards.
If you do decide to invest in consumer credit loans, it’s important to diversify your portfolio and keep an eye on regulatory changes and economic conditions that could impact the industry.
Additionally, you may want to consider investing in payday loan companies that have a strong track record of responsible lending practices and ethical business practices.
Ultimately, investing in payday loan companies is not for everyone.
If you’re uncomfortable with the controversy surrounding the payday loan industry or are looking for a more socially responsible investment option, there are plenty of other investment opportunities available.
In any case, it’s always important to consult with a financial advisor or investment professional before making any investment decisions.
They can provide valuable guidance and help you make informed decisions that align with your investment goals and risk tolerance.
For the record, we do investing consumer credit loans. Consumer credit loans are a small but important part of our income investing portfolio. Generating income from consumer credit loans has been an important but difficult part of our portfolio to research and implement ethically.
Cheers!
