Lending – The Most Profitable Business – Loans for Business
It is no secret that lending today is considered one of the most profitable businesses. Lenders’ profits in both the banking and non-banking sectors consist mainly of interest payments on a service or loan. Of course, lenders also receive other types of income, such as credit agreement fees, penalty interest, loan refinancing fees, and other types of income.
Creditors of the banking sector granted loans of USD 15,618,219 thousand
While non-bank lenders granted loans of USD 348,347 thousand. In order to understand the significant difference in loan ratios between these lenders, it should be noted that they are measured at a ratio of about 1:10, in which Latvian commercial banks prevail. In the same year 2013, creditors of the banking sector generated a profit of USD 246.2 million from the aforementioned loans, compared with USD 38.4 million for non-bank creditors.
Currently, the Latvian legislation governing the financial system allows for free lending to both legal and natural persons. As mentioned above, both bank and non-bank lenders are involved in lending, but the differences between these lenders are quite significant and will be discussed below.
There are 28 commercial banks and 18 non-bank lenders operating
According to the Association of Latvian Commercial Banks and the Latvian Association of Non-bank Lenders. Bank lenders mainly focus on long-term loans, such as mortgages, consumer loans, credit lines or study loans, whereas non-bank lenders are mainly focused on short-term or micro loans. Of course, many non-bank lenders also provide long-term loans such as car leasing or consumer loans.
According to statistics, the services of non-bank creditors are mainly used by middle- or low-income residents to solve everyday, unforeseen and urgent needs. In contrast, the services of bank lenders are mainly used by wealthier citizens, such as credit cards, overdraft or consumer credit.
Paradoxically, bank financial products are significantly cheaper
Than non-bank financial products. For this reason, it would seem that it would be more profitable for less affluent citizens to use banking services, but bank loans are made subject to many and varied conditions which make their services inaccessible to the general public.
The main factor behind these significant differences in service prices between the two sectors is the APR, which is only a couple of tenths of a percentage for banks, while for non-bank lenders it is hundreds of percent, which forces the borrower to overpay. Of course, it should be recalled that non-bank lender services are short-term services, so comparing them with long-term banking services is not adequate. At the same time, it should be emphasized that lenders in both sectors also offer interest-free services such as credit cards (bank) and first-time loans (non-bank).