Of the many topics in the personal finance realm, short term loans are posted about less often than most. Writing about them seems to be a faux pas in the pf realm. Most people cringe when they hear the words and perhaps rightfully so. Sometimes these loans prey on the lower class and provide an easy way for them to get into a lot of debt. As I personally am committed to leading a debt-free life (except maybe a Mortgage), you might think I’d be tempted to agree. The other, entrepreneurial, part of me, has to wonder if it is a viable business model.
It is a Profitable Business
Regardless of what your personal opinions may be of the business structure, a New York Times article reports the following:
“Collectively, loan borrowers spend about $7.4 billion annually at storefronts, Web sites and, increasingly, banks.”
I don’t care who you are, that is a large market to work within. If you have a market with that high of demand, you have to consider what it is a viable business model. If a short term loan company (like wonga.ca) can make that much money, you have to ask yourself if you could compete. For example, if that many people are interested in short-term loans, what’s to say that you couldn’t go in with an offer for consumers? If you could have lower operating costs and lower expenses for the consumer, you’d not only draw interest, but would affect the market altogether. Prices would have to drop to match the competition and people wouldn’t have to pay as much (or be in debt as long) to get the same upside.
Is the Secret to a Profitable Business Meeting a Need?
Call me a cynic, but I can’t help but think that these loans are profitable because there is a need in the market. People need a viable way to pay for expenses that come up. Not everyone can afford to save up an emergency fund without a little help. While it is clear that taking out a loan will not help for an extended time period, it may help bridge the gap of a temporary shortage.
While it may be a profitable business, and tempting to enter the supply of these types of loans in order to drive down the rates, I don’t see myself going into this business. I still think the best business model for me is one that is centered on information. While I may shift to sell some sort of product or service, I take pride in knowing that my side business is also providing useful information for people all over the world. While you may be tempted to meet a need of the market to make a profit, be sure that you’re being responsible.
Readers, have you ever thought about offering lower rates for short-term loans?