Fang Liwen lent his friend 400,000 yuan ($59,523) in January at an interest rate of 11 percent a month or 30 percent over six months.
His friend runs a small logistics company in Yancheng, a prefecture-level city in northeastern Jiangsu Province.
"I grew up with my friend in that small city and I trust him," Fang said.
"And he really needs the money to pass the annual inspection by the local Industrial and Commercial Bureau.
"Plus the return is also very good after six months."
The annual inspection will check the company to confirm that it still has the same registered capital as when it started operation.
As soon as registration is completed, many small companies take the money out for business but can't make enough back in time for the annual inspection.
In June this year, Fang will have made a cool 120,000 yuan ($17,857) in tax-free interest, almost the same as a well-paid white collar worker earns annually in cities like Beijing and Shanghai.
Many borrow and lend money -- mostly to friends and relatives -- but few realize the risks.
The lending is legal, but the interest cannot be more than four times higher the People's Bank of China rate: 5.1 percent for a six month loan or 20.4 percent ceiling.
"We had many cases of folk lending where either the lender didn't get the money back or they didn't get full money back," said a judge surnamed Dai from the Jiangsu Yancheng People's Court.
"I mean they didn't get the interest the two sides promised and wrote down. But the law now only protects the money at four times the interest rate.
"Over and above that amount if the borrowers don't give back the money to the lender, our hands are tied. And such cases happen frequently."
That's precisely why she only lends money to people who she knows well and trusts, explains Feng Xixi, a resident of the prefecture-level city of Zhuji, Zhejiang Province.
Feng lent her friend money at higher interest than the rate protected by law.
"But to tell you the truth," she said, "I'm also worried."
The booming business reflects an almost inelastic demand for loans against the limited capacity of the formal bank lending system, said Hua Wei, a professor at the Financial Institution of Fudan Uni-versity in Shanghai.
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