How much money can you make lending money?
By Equipo Prestafolio
The gap between the rate you charge and what you actually keep: how arrears, default and operating cost eat into a large share of the gross interest.
The question is not how much interest you charge, it is how much you keep after some clients do not pay and the business costs you time and money to run. A lender who charges 8% monthly and touts that figure as their profit is almost never looking at the whole number: between the gross rate and the real net profit there are two deductions most lenders never calculate, and they are exactly the ones that decide whether the business is worth it.
The full sum almost nobody does
Making money by lending has three layers, and most lenders only look at the first one:
Layer | What it is | Who calculates it |
|---|---|---|
Gross interest | What you charge on the capital lent | Everyone |
Expected loss | The capital from loans that do not come back, fully or partly | Few |
Operating cost | Collectors, transport, your own time, software | Almost nobody, especially if they collect themselves |
Real profit is gross interest minus expected loss minus operating cost. Skip the two deductions and your "profit" is really an optimistic estimate you will not see reflected in your pocket at the end of the year.
A full example: a 10,000 portfolio at 8% monthly
Assume 100 loans of 100 each (10,000 lent in total), at 8% monthly, and that 5% of the portfolio does not come back at all (total default, not just late payment):
Item | Calculation | Monthly result |
|---|---|---|
Gross interest income | 10,000 × 8% | 800 |
Expected loss (capital that never comes back) | 5% × 10,000 | −500 |
Operating cost (collectors, transport, time) | Reasonable estimate for this portfolio | −150 |
Real net profit | 800 − 500 − 150 | 150 |
That advertised 8% monthly ended up being 1.5% real net monthly on the capital lent. It is not that the 8% was a lie: it is that the 8% was income, not profit, and the gap between those two numbers is exactly what this article wants you to stop ignoring.
The component that hides the most profitability: expected loss
If out of every 100 loans, 5 do not come back in full, you did not lose 5% of your profit: you lost the entire capital of those 5 loans, and that capital has to be covered by the other 95 through THEIR interest. The higher your real default rate (not late payment, actual default that never gets recovered), the bigger your gross rate has to be just to break even, before you start earning anything. We cover this with the full formula in How much interest to charge for lending money.
This is also why evaluating who you lend to is not an optional step: dropping your real default rate from 5% to 2% in the example above almost triples your net profit, without touching the interest rate by a single point. See How to tell if a client pays well.
The component you forget if you collect yourself
If you walk the collection route yourself, answer messages and keep the records, your time has a cost even if you do not pay yourself a formal salary. The question that separates a real business from a hobby that looks like a business is: if you had to pay someone else to do exactly what you do, how much would you pay them? That number, even as an estimate, has to be subtracted from your profit. Skip it, and your "profitable" business may really be a poorly paid job that also puts your capital at risk.
How to actually improve your net profit (in order of impact)
Lever | Effect on net profit | Cost to apply it |
|---|---|---|
Lower your real default rate (better evaluation) | High: every point of default avoided is full capital that does not get lost | Time spent evaluating each client |
Raise the interest rate | Medium, and it has a ceiling: the market and the law both limit it | No direct cost, but it can reduce your demand |
Lower operating cost (more efficient routes, digital collection) | Medium | Upfront investment in organisation or a tool |
Diversify the portfolio (less capital per client) | Does not raise expected profit, but reduces variance: less risk of one big hit | None, it is an allocation decision |
The most effective lever is almost never "charge more": it is losing less capital to default. A lender who cuts their default rate from 5% to 2% earns more than one who raises their rate from 8% to 10% and keeps losing 5%.
Why collection frequency also changes your profitability
Collecting daily catches a payment problem within 24 hours; collecting monthly tells you up to a month late, when it is already harder to fix. That difference translates directly into your expected loss: the faster you spot a delay, the faster you can act before it turns into a full default. Which also means the operating cost of collecting daily (more visits, more time) is buying you a real reduction in risk, not just an inconvenience.
Calculate your own net profit
Try the example above with your own numbers in the portfolio profitability calculator: enter your capital, your rate, your default/write-off rate and your operating cost, and compare your gross interest against your real net profit.
Frequently asked questions
What net monthly return is "good" for this business? There is no universal number: it depends on your opportunity cost (what else that capital could earn) and your risk tolerance, because unlike a passive investment, here the capital CAN be lost outright on a slice of the portfolio. What is a real red flag is not knowing your real net number: if you never calculate it, you cannot know if it is worth continuing.
How do I estimate expected loss if I am new and have no history? Start with a conservative estimate (5-10% is reasonable for a new portfolio with no track record) and adjust it with your own data after the first 6-12 months. Underestimating expected loss at the start is the most common mistake a new lender makes.
Should net profit include my own salary? Yes, if you are the one doing the collecting, evaluating and record-keeping. If you do not put a value on your time, you cannot compare this business against other ways of putting your capital and your time to work separately.
Summary
- Net profit = gross interest − expected loss − operating cost. Most lenders only calculate the first one.
- An 8% monthly gross rate can end up at 1.5% real net once default and costs are deducted.
- The most effective lever is almost always lowering real default, not raising the rate.
- Collecting faster (higher frequency) lowers expected loss, even if operating cost goes up.
- If you collect yourself, your time has a cost: include it, or your "profit" is inflated.
Prestafolio calculates your whole portfolio (capital placed, interest collected, arrears and defaults) in a single report, so you see your real net profit and not just the rate you charge: see Portfolio report and Trust and credit history.