Making money from an activity that you are not actively involved in, that is passive income. Many people don’t know that through lending platforms it is possible to generate a passive income. Lending platforms are relatively new and unknown. However, in recent years these platforms have made huge steps and is no longer just for startups or charity. By investing through lending platforms you can generate passive income.
How does it work?
Lending platforms offer complementary financing for organisations or individuals, where they are financed by others through loans. The bank is skipped. Lending is gaining traction, because companies are not always able to turn to their bank for financing. For instance, the reason for a loan, such as digitalisation or marketing, does not fall within the bank’s framework or the loan amount is too low and the bank cannot make enough money. Factors such as flexibility, speed and customer-friendliness also play a role in choosing an alternative to the bank.
An investment in these loans provides a predictable income; the company pays interest on the money you lend. Companies that borrow through October pay between 2.5% and 9.9% interest, depending on the perceived risk. Because companies repay interest and capital monthly, you create a monthly cashflow on your account, for which you only make a one-off investment. This is your passive income.
How much passive income can you make?
On October, the return equals the interest a company pays on your loan. The amount of your passive income therefore depends on 3 components:
The interest rate
The higher the interest rate, the higher your income. A higher interest rate often means a higher risk. You can choose which projects you invest in and thus control your risk.
The duration of the project
The longer the duration of a loan, the more the repayment is spread out. Therefore, a longer duration means that less capital is repaid each month. The duration of loans on October vary between 12 and 84 months.
The size of your investment
The higher your investment, the more interest you receive. This is because the interest is calculated as a percentage of your investment. On October you can start with any budget, due to the low entry boundary of €20 per project. Besides, that enables you to build a diversified portfolio easily.
An example of a return calculation.
You lend €5,000. To keep it simple, you lend to projects with a maturity of 24 months and an interest rate of 6%. Because the loans are repaid on October through annuities, this investment yields a stable cashflow of €221.42 per month. A total of €5,314.03 will be repaid. There are no costs for lenders on October, so your profit is €314,03 on this investment after 2 years.
How to start making passive income?
To make passive income you need to make an initial investment. After that, the money will be repaid to your October account on a monthly basis.
Like any investment, lending is not without risk. There is a risk that a company you are lending to will not be able to repay the loan and that you lose your investment. This is called a default. You can protect yourself against this by spreading your investment as much as possible over different projects. This costs extra time, but you do reap the benefits of a lower risk. If you diversify your investment well, a default has a smaller impact and your losses are compensated by the loans that are repaid.
Want to make a progressive income? Reinvest your repayments. Then you will benefit from compound interest and your assets will grow, without having to make an additional deposit.
Get started right away
Got excited? Create an account directly with October. This way you can explore the platform and see if there are any projects that suit you. Would you rather immerse yourself in lending before you start? Read all that you need to know in our tutorials. Curious about the experiences of other investors? Have a look at our Trustpilot reviews.