Lending Investments Explained: Earn Money Like a Banker

Over 300 years ago, somewhere in London, goldsmiths started storing other people’s precious metals in their vaults as a service. Later on, these goldsmiths realized that since most people don't show up out of the blue wanting to withdraw all their gold at once, they could actually lend these deposits out to other people, earn interest on them, and then return the repaid gold before anyone noticed it was missing. 

This earned interest allowed goldsmiths to provide ever safer storage for valuables, which attracted more depositors, and allowed them to loan out higher quantities of gold ad infinitum. What started out remarkably similar to a Ponzi scheme is now a common practice called fractional reserve banking, which kickstarted the $90 trillion banking industry we know today. 

In other words, if you have money in a savings account, your bank is likely lending it out right now and making money off of it. Your savings could be funding someone else's car or home loan, and your bank is raking in the interest while passing down a paltry 0.01% to you. So what if you cut out the middleman and profit off that interest for yourself?

Thanks to the rise of lending investment apps, you no longer have to be a banker to earn money like one.

Let’s get some basics out of the way. Investments are assets that you buy with the hope that they’ll turn a profit, right? Like when you YOLO’d your life savings on $GME because someone on Reddit convinced you it was a good idea.

Stocks, real estate, and bonds aren’t your only investment options, though. In fact, there are hundreds of platforms that let you invest in alternative assets outside of the more mainstream options.

Overwhelmed? Don’t be, because you can boil all of these investments down to only three basic categories:

• Ownership investments: The most volatile (and profitable) of the three, this is the category most people associate with investing. It includes assets you buy and own, like stocks, real estate, precious metals, fine art, and more. 
• Cash equivalents: The most liquid of the bunch, these either refer to cash or investments that are as good as cash. Examples include physical cash, savings accounts, and money market funds.
• Lending investments: Last but not least, lending as an investment is when you cover someone else’s debt with an agreement that they’ll repay you with interest. This investment class is largely responsible for the trillions in banking revenue generated each year. 

In the olden days, businesses and individuals could only get loans from banks or credit unions. But the problem with borrowing from these financial dinosaurs is that:

1. Borrowers have to pass through an obstacle course of paperwork and credit checks first, and a single credit score isn't always the best way to judge whether or not someone will actually repay their loan.
2. The interest rate on that loan is YUUGE. 

This means that a lot of people get left out of traditional lending. And on the other side of the coin, you have everyday people who have some extra cash burning a hole in their pocket that could be earning interest. Put these two parties together, and you open up a whole new class of investment opportunities.

Lending investments are a win-win for both investors and borrowers. Let’s start with the borrowers.

Some people can’t get approved for loans at traditional financial institutions because they:

1. Have low credit scores (curse you 1-Click Checkout)
2. Have a short or no credit history

Some of these borrowers are genuinely riskier, but others have simply fallen through the cracks of traditional banking (maybe they've never needed to borrow money before, or maybe they recently moved to the US). This creates an opportunity for investors like you to add private debt to your portfolio by doing things like lending funds for a real estate project or helping to finance a small business.

These platforms have developed sophisticated algorithms and automated technology for vetting these borrowers based on more than just credit scores. So now, instead of undergoing a day's or weeks-long process to get a bank loan approved (or declined), a borrower can take out a loan online in just a few clicks.

But what about investors? Well, since loans offer fixed terms and interest rates, lending can be less risky than other investments. Plus, if you find the sweet spot of lending to trustworthy borrowers that are producing value with that money, you can easily see returns in the double digits. 

This is why investing pros like to add lending investments to their portfolio in hopes of beating the stock market. Do temper your expectations, though. You’re not going to make billions in FU money like Bobby Axelrod by helping Bill buy a Honda Civic. 

But on another positive note, lending investments have a low barrier to entry. You can start lending with as little as $10. So break open your piggy bank, grab all the spare change hiding in between those couch cushions, and let's get started.

When it comes to lending investments and platforms, you’ve got about as many options as Loki has variants.

1. Savings accounts that actually pay

The most time-tested lending investment is… a savings account. 

“BOOORING. Dislike, unsubscribe.” 

Hear us out. You may not consider savings accounts to be a lending investment, but they are. Think about it: you’re lending your money to a bank, which the bank then loans to someone else.

If your bank is only netting you 0.01% on your savings account, you're getting played. High-yield savings accounts like Axos Bank, Chime and Affirm let you earn up to 60x that while keeping your funds FDIC-insured, which goes a long way in helping you sleep well at night.

2. Make mailbox money from real estate

Offering anywhere from 9-20% annual yield, peer-to-peer (P2P) lending flips traditional banking on its head. By cutting out the middleman, the investor becomes the bank using these marketplaces to lend money directly to people and businesses.

Some of these P2P sites, like Peerstreet and Fund That Flip, specialize in real estate only. Why fix broken toilets for ungrateful tenants when you can earn rental income with your feet up from the comfort of your La-Z-Boy? With Peerstreet, you only need $1,000 to start investing in high-quality real estate loans.

3. Using crowd wisdom to lend to winning projects

There is some overlap between crowdfunding and peer-to-peer lending, but like siamese twins,  the two are ever so slightly different. With crowdfunding, you’re investing your money in support of a well-defined project and pooling it with other investors like you until the project is funded. As the project is implemented and becomes profitable, you earn a portion of that profit in the form of interest.

This can include lending to everything from real estate projects to online startups to brick-and-mortar businesses. For example, Mainvest lets you lend to local hotspots like breweries and food trucks that are hoping to expand, and they pay you a portion of their revenue until you hit your target returns.

Yieldstreet lets you generate passive income by investing in a diverse selection of loans (including everything from real estate loans to marine financing to fine artwork-backed loans) and then raking in the interest.

A bond can refer to many kinds of investments, but what they all have in common is debt. When you buy a bond, you’re actually lending money to an entity (e.g. a government or company), which they will repay with interest over a fixed term.

But Worthy put its own unique spin on this. It sells users the Worthy Bond and then lends the proceeds to growing businesses who can’t get loans elsewhere. In exchange for that bond, you  get a fixed 5% annual yield that’s paid out every day. It's like a savings account on steroids.

Speaking of unique bonds though, we can’t not mention Bowie Bonds. Introduced in 1997 by the rock musician David Bowie, a Bowie Bond was backed by the expected earnings of his back catalog of 25 albums and offered 7.9% interest over ten years. As you can probably guess, the Starman’s investment went to the moon.

Lending investments are particularly suited to these three investor profiles:

• Investors who don’t have that much money to get started.
• Investors who can’t stomach the volatility of high-risk assets like crypto but want to aim for higher returns.
• Investors who want to diversify their portfolio beyond ownership investments into interest-bearing investments.

Sure, lending has risks like liquidation, but bankers have been making a killing with it for centuries. With platforms that let you invest as little as $10, why not get in on the action?