In short
Mainly from interest on the outstanding balance. Three other sources exist — fees, default interest, and proceeds from realising security — but only interest from a performing borrower pays reliably. The quoted rate is not the return. Capital earns nothing between loans, so a lender deployed ten months of twelve at 18% has already dropped to about 15%. Then come legal and registration costs, paid whether or not the loan performs, then tax at the rate applying to whoever lent, then losses. Ten loans at 18% with one total capital loss is roughly a break-even year, which is why concentration matters more than rate.
A private lender earns money in four ways, and only the first one is obvious. Three of them turn on interest in some form. Understanding the other three is the difference between a rate you were quoted and a return you actually got.
01 — The fourWhere the money comes from
| Source | What it is | How reliable |
|---|---|---|
| Interest | The rate on the outstanding balance. The main event. | Reliable while the borrower pays. Stops the moment they do not. |
| Fees | Initiation, arrangement or exit fees charged at the start or end. | Certain, because they are taken up front — but capped or prohibited where the Act applies. |
| Default interest | A higher rate once the borrower is in arrears. | Unreliable. A borrower who cannot pay the normal rate will not pay a higher one. |
| Recovery of security | Selling what was pledged, if it comes to that. | Slow, expensive, and usually returns less than the paper said. |
02 — The gapWhy the quoted rate is not the return
A lender quoted 18% does not earn 18%. Several things sit between the headline and the money, and they are all predictable enough to plan for.
Idle capital
Money only earns while it is lent. Between one loan being repaid and the next being placed, it earns nothing. A lender who is deployed ten months of twelve at 18% has earned 15% on the capital, before anything else.
Costs
Attorney fees for the agreement and the security. Bond registration. Valuations. Searches. On a small loan these can be a meaningful share of the first year's interest, and they are paid whether or not the loan performs.
Tax
Interest is income. It is taxed as income, at the rate applying to whoever lent — an individual, a company or a trust — and that is a materially different figure depending on which. This is a real decision rather than an administrative detail.
Losses
The one that dominates everything. A lender with ten loans at 18% who loses one entire capital amount has not earned 18% minus a bit. They have earned roughly nothing that year.
Run that arithmetic before lending, not after. Ten loans at 18%, one total loss, is a year of work for about break-even. That is why concentration matters more than rate.
03 — PricingA higher rate is a warning, not a reward
New lenders sort opportunities by rate. Experienced ones treat a high rate as information about the borrower.
A borrower paying well above the market is usually doing so because a cheaper lender declined them. Sometimes that is a timing problem or an unusual asset, which is a real and fair reason. Often it is a credit problem that a bank saw and you have not.
- Ask why the rate is what it is. If nobody can explain it in terms of the specific situation, the explanation is credit risk.
- Compare it to what a bank would charge for something similar. A large gap needs a reason beyond 'banks are slow'.
- Remember the arithmetic is asymmetric. An extra 4% on the rate adds a little. Losing the capital removes everything.
04 — In practiceWhat separates lenders who make money
Across the different models, the lenders who do consistently well tend to share four habits.
- They lend on the exit, not the asset. The question is not what the security is worth, but how the borrower plans to repay and what happens if that plan fails.
- They spread. Enough loans that one failure is a bad year rather than the end.
- They keep capital back. Recovery costs money, and a lender with nothing spare cannot enforce their own security.
- They document properly. Most of what protects a lender was decided before the money moved.
05 — The limitsWhat you are allowed to charge
Where the National Credit Act governs the loan, the price is not yours to set freely. Interest is capped against the repurchase rate, and section 101 gives a closed list of what may be charged at all — so an arrangement fee or a documentation fee is not a capped charge but one that may not be made.
Once the borrower is in default, what accrues is capped again by the in duplum rule. Both are set out at what you may charge and the in duplum rule.
Much lending to businesses falls outside the Act, where there is no prescribed cap. The common-law in duplum rule still applies, and it cannot be contracted out of.
06 — The boundaryWhat this page does not decide
This page sets out where a lender's return comes from and what erodes it. It does not tell you what rate to charge, what a particular loan is worth, or what you should expect to earn.
Nothing here is a projection or a promise. Any rate you see quoted anywhere is a rate before costs, before tax, before idle time and before losses.