One of the growing trends in personal finances is to finance microloans for the less fortunate. It is possible to help others while making money at the same time.
What are microloans?
Microloans, as the name suggests, are loans made in small increments. They are generally made to entrepreneurs in developing countries so that they can buy materials and other necessities for running a business. It works something like this:
An entrepreneur in poverty goes to an organization like Kiva. He or she lists how much money is needed to get a proposed business off the ground. Those of us in developed countries also visit the organization (usually via Web), and help finance the loan. If someone requests $2,000, but you can only spare $500, that is okay. You loan your $500 and others loan other amounts. You earn interest on the loan, receiving money in your account as the entrepreneur makes payments.
Many are finding this a satisfying way to create a small revenue stream, since it does more than bring in cash flow; microloans also help others else improve their lives.
Benefits of microloans
Microloans benefit both the lender and the borrower. Most often, microloans provide a mutually beneficial arrangement, allowing both parties to “win.”
credit: Duquesa Mercedes
One of the biggest benefits to the borrower is the fact that a microloan facilitated by a respected organization comes with a much lower interest rate than other loans that he or she could get. Instead of paying between 11% and more than 20% to usurious lenders that take advantage of the poor, microloans average around 7% for the lender. This means that more of the money goes to actually building the business. And it makes repayment much more manageable. With the money made from a successful business venture (and most borrowers’ ideas are screened for feasibility), the borrower can ultimately improve his or her quality of life.
Lenders also get benefits. It is true that the return on the investment isn’t terribly exciting for lenders, so the monetary benefits are rather conservative as investments go. But there are other benefits that lenders receive. There is a feeling of well-being and happiness that can come from helping others (especially when keeping with Bible’s injunction against usury). Additionally, microloans aren’t considered terribly risky. The repayment rate is around 97% on microloans, making them less risky than person-to-person lending that you run into in the United States. Properly used, microloans can make a good addition to a well-balanced asset portfolio.
It is important to make sure that you use a reputable organization when becoming involved with microloans. You want to make sure that most of the money gets to the entrepreneur, rather than having larges chunks of it siphoned off as fees. Also, you should read about those you lend money to, and choose borrowers whose plans are more likely to succeed. When you become involved with microloans in the right spirit, both you and the borrower can benefit.
Interesting concept! It is cool that you can use your money to earn a return and do some good at the same time.
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The idea of microloans is an interesting one… though I don’t think I’ll personally become involved.
I did want to note, or rather ask, what exactly makes 11% interest rates “usurious”? Someone with little / no / poor credit history should pay a higher rate than someone with a long history of good credit. That’s just smart business, not usury. IMHO, anyway.
Thanks for the comments! I do not believe that the loans are secured. And no, you won’t get a very large return. The idea is more helping others, and you get a rather small return — as a bonus.
You will make more going through a p2p site like Prosper, since the return is higher. Microloans for those in poverty are, as I said, just a step up from charity, and the main goal isn’t returns for the lenders.
I’m not saying that 11% – 20% is usurious in all cases. But I think circumstance have a lot to do with it. 11% interest is HUGE to someone in a third-world country, and it severely affects their ability to repay.
Kiva quotes interest rates as the “self reported average rate charged by the Field Partner to the entrepreneur.” As of January 7, 2010, 35.21% is the Average Interest Rate and Fees Borrowers Pay (Portfolio Yield) to All Kiva Field Partners.
Kiva doesn’t pay the lender any interest, at most you get your money back. Kiva gives your money to a partner in the region who lends the money out and collects and keeps all the interest.
As of today, 10/20/2017, only US borrowers can borrow interest free. Those loans have a much lower repayment rate, around 80%. Once again, the lender at most gets their money back.
Great to see your write up on microfinance. The rate of interest is controversial. MF interest rates are high, but as pointed out, that’s because they must cover the high overhead for Microfinance Institutions managing so many small borrowers’ accounts. Costs are coming down through technology and continually improved management.
That said, in Mexico in particular, highrates for consumer loans are the norm, like around 100%,and this is a sort of bastardized view of microlending. It’s basically mainstream banks making a ton of money lending to low-income people. This is a huge controversy in the microlending world.
Check out the wonderful microfinance organization I work with – our mission is to help finance clean electricity for the “Bottom of the Pyramid”, the 1.8 billion people with no direct access to electricity:
http://www.greenmicrofinance.org
I am a single mother of 3 kids, I am not going to be able to give them a christmas this year “2011” If anyone is intrested in Adopting my family for the Holidays please email me! I am very worried I am not going to know what to say to these children who wake up Christmas Morning to nothing! PLEASE do not cut me down it is hard enough to ask for help!
Thank you,
Jennie