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WEB REVIEW: Micro-managing your loans online

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Jim Cota

As the credit market tightened in recent years, an interesting trend emerged to serve lending needs for businesses and consumers here and abroad. It’s called micro lending and, in some ways, it’s changing the way people think about lending and borrowing.

Micro lending began as a way for people to offer very small loans to those in poverty. The loans were designed to spur idea generation and entrepreneurship at the local level. The primary goal is to empower people to create something that provides for self-employment and, eventually, wealth accumulation to lift them from poverty to self-sustainment. While examples of the concept of micro lending have been around for centuries, most people attribute the birth of modern microfinance to a bank in Bangladesh in the late 1970s.

With the emergence of the Internet, many of these organizations went online. Probably the best known is Kiva (www.kiva.com). Founded in 2005, Kiva envisions “a world where all people hold the power to create opportunity for themselves and others.” So far, almost 600,000 people made more than $200 million available for loans through Kiva, which boasts a repayment rate of 98.75 percent—which is better than many banks. In one recent week alone, more than $1.6 million has been loaned to 4,000 entrepreneurs. At an average value of $400, it doesn’t seem like much to most of us. But for people living in poverty, it can literally be a lifesaver.

Recently, however, the concept has undergone a bit of a transformation. While many of the originals were not-for-profits like Kiva, micro lending is increasingly becoming a for-profit enterprise, especially as the loans move from poverty-stricken locales into the Western world.

The result has been both good and bad, as you can imagine. But if done correctly, under the right kinds of oversight, the loans can provide a way out for people who need help and an interesting investment opportunity for people looking to get a better return on their money than is currently available in savings accounts, CDs or money markets. One of the changes that made this possible: group lending.

Let’s say your brother needs to borrow $1,000. Instead of you loaning him the money directly, you get nine of your friends to each put in $100. That $900, with your $100, gives him the amount he needs. But the risk of his defaulting is spread over the entire group, which, knowing your brother, makes it more palatable for everyone. With each payment (including interest), all 10 of you receive a small payment. Over time, the entire loan is paid off, all 10 lenders make a little money to offset their risk, and your brother has a clean slate.

Several organizations online allow you to do the same thing with people you don’t even know. Each borrower submits a credit history and a description of what they need. The organization vets the information for accuracy and operates as a middle man to disperse payments all around.

As an individual investor, you can put in as much or as little as you like, and you can determine how much of your money goes to whom, allowing you further leverage to mitigate your risk. Two of the more popular options are Prosper (www.prosper.com) and Lending Club (www.lendingclub.com).

In each case, you can decide whom to lend to, and you’ll see detailed information about who is borrowing, what the money will go toward, and what the payment options are.

You can decide, for example, that you’ll happily loan money to someone to pay off another higher-interest debt but you won’t make the loan to help him buy a motorcycle. It’s entirely up to you. The nice thing about both options is that you put your money into an account you control, you decide how much (and to whom) to lend, and the organization takes care of the rest … for a small fee. Right now, Prosper is offering an actual rate of return above 10 percent. (Keep in mind that I’m not a financial planner, so talk with a professional you trust before you invest in either of these organizations.)

While micro lending is an interesting option for both borrower and lender, even Kiva will tell you it’s not a silver bullet. Rather, it’s one strategy among many to battle a huge problem.

For more information on the impact micro lending is having on poverty, see Freedom from Hunger (www.freedomfromhunger.org).•

__________

Cota is creative director of Rare Bird Inc., a full-service advertising agency specializing in the use of new technologies. His column appears monthly. He can be reached at jim@rarebirdinc.com.

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  • Micro-managing
    A financial plan is a blueprint to achieve goals. It should include a thorough assessment of your present financial position and future cash flows. However, the success of this plan depends on the execution – that is, investing the right amount in the right vehicle. To achieve this, you need to have the right asset allocation keeping taxation, liquidity and long-term goals in mind. Asset allocation strategy: Many prefer to use thumb rules for allocating their assets. A popular one is subtracting age from 100. The result is the percentage of equity allocation one should have. However asset allocation is dynamic and should change according to goals, risk profile, investible surplus, and so on. Thus asset allocation varies for different people, in different situations despite being in the same age group.
    Valery from online loans

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  1. Apologies for the wall of text. I promise I had this nicely formatted in paragraphs in Notepad before pasting here.

  2. I believe that is incorrect Sir, the people's tax-dollars are NOT paying for the companies investment. Without the tax-break the company would be paying an ADDITIONAL $11.1 million in taxes ON TOP of their $22.5 Million investment (Building + IT), for a total of $33.6M or a 50% tax rate. Also, the article does not specify what the total taxes were BEFORE the break. Usually such a corporate tax-break is a 'discount' not a 100% wavier of tax obligations. For sake of example lets say the original taxes added up to $30M over 10 years. $12.5M, New Building $10.0M, IT infrastructure $30.0M, Total Taxes (Example Number) == $52.5M ININ's Cost - $1.8M /10 years, Tax Break (Building) - $0.75M /10 years, Tax Break (IT Infrastructure) - $8.6M /2 years, Tax Breaks (against Hiring Commitment: 430 new jobs /2 years) == 11.5M Possible tax breaks. ININ TOTAL COST: $41M Even if you assume a 100% break, change the '30.0M' to '11.5M' and you can see the Company will be paying a minimum of $22.5, out-of-pocket for their capital-investment - NOT the tax-payers. Also note, much of this money is being spent locally in Indiana and it is creating 430 jobs in your city. I admit I'm a little unclear which tax-breaks are allocated to exactly which expenses. Clearly this is all oversimplified but I think we have both made our points! :) Sorry for the long post.

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