If becoming wealthy is your goal in 2020, one great way to get on the track to wealth is becoming a subprime lender. In simple terms, subprime lenders can be anyone who uses their own money to make loans to those who couldn't otherwise qualify for a loan and charging high-interest rates on the repayment of the loans.
It is not uncommon for the interest rate on a subprime loan to be as high as 18%. Where else can you can get that kind of return on your money? There is no official data, though it’s estimated that at least 100,000 such lenders exist — and the trend is on the rise, says Larry Muck, chairman of the American Association of Private Lenders, which represents a range of lenders including private-equity firms and individuals who are lending their own cash. “We know the number of people who are doing this is increasing dramatically — over the last year it’s grown exponentially,” he says.
Often referred to as hard-money lending, the practice of subprime lending has undergone a significant shift in the past three or so years. It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks of hard money, or subprime, lenders.
Many of these so-called mom-and-pop lenders are using their retirement accounts — self-directed individual retirement accounts and self-directed 401(k)s — to fund other people’s loans. Unlike regular IRAs and 401(k)s, self-directed accounts permit investing in alternative assets, like real estate. Cash is not technically withdrawn from the account, but rather a portion of the account equal to the dollar amount the borrower needs is invested in loan. The borrowers’ monthly payments, including interest rates, are paid into the retirement account, which ends up taking ownership of the borrower's collateral if they default.
In a sign that the trend may be here to stay, boot camps are training average Joes to become private lenders. Last month, Wealth Classes, a financial-education company based in Walnut Creek, Calif., that launched in 2007, hosted a networking retreat for 250 students who recently became lenders. Many of the company’s students end up lending to subprime borrowers, though others lend to real estate investors who don’t want to wait weeks to get a mortgage from a bank, says George Antone, founder of Wealth Classes. (Private lending transactions typically take about a week or two to go through, while a mortgage from a bank usually requires at least one month of waiting time.)
It’s not just mom-and-pop lenders who are becoming subprime loan officers. The strategy is picking up on an institutional level as well. Experts say a growing number of private-equity funds and hedge funds are pooling together individual investors’ cash and using those funds to lend to subprime borrowers at high-interest rates. Going forward, experts say, it will be difficult to slow down privately funded subprime loans.
MoneyThumb has many customers who are subprime lenders that use PDF Insights to help them quickly vet potential borrowers. In this former Rules of Thumb blog post titled For Lenders: Approving Loans Just Got Easier With PDF Insights, we explain in depth how using our financial file converters specifically designed for lenders can make the lending process run so much more smoothly. PDF Insights automatically converts PDF bank statements, credit card statements, brokerage statements and tax forms into the format needed to ingest data into downstream systems.
PDF Insights utilizes IDR (intelligent document recognition) to identify bank or bank statement formats. Unlike competing solutions, this software doesn’t need to be told upfront which bank or format is being used, yet correctly processes over 99% of U.S. bank statements. The output from each statement is delivered in a standardized format, even for statements from different banks.
In addition to text-based PDF statements, PDF Insights also processes scanned or faxed image-based PDF statements. Our proprietary OCR algorithms review questionable fields, look for patterns to self-correct and then flag transactions that are still unknown or questionable for manual review and correction.
PDF Insights can be installed as a web service that can be called to convert several bank statements at the same time. This web service can be locally installed on your bank’s servers to function as a powerful batch processing engine for your custom workflows.
Our automated statement reconciliation feature compares transaction totals to summary information on the statement. If all information on the statement is consistent, PDF Insights will identify the statement as reconciled, meaning you don’t have to spend time manually reviewing statements to identify inconsistencies.
If 2020 is the year you decide to head down the road toward new wealth as a subprime lender, using PDF Insights will help you get there faster with a lot less hassle.