Microlending: Interest Rates, Flaws and Alternatives to Kiva

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Microlending: Interest Rates, Flaws and Alternatives

I have seen much criticism of microlending in the past months. Some are calling it loan-sharking, others the new "charity mafia."

Micro lending is a noble idea. Some do it better than others, but microlenders who charge interest have taken some criticism from those who probably needed to pay more attention in their high school practical math class. {BTW you hear the same sort of thing from people who can not understand the interest calculations on their home mortgage.}

Micro lending is the making of small, or micro, loans to small businesses for start up or expansion. It the US market a micro loan is generally considered anything under $35,000. In many other countries however, a loan of as little as a few hundred dollars can mean lifting a family out of poverty.

I am putting this page up in my frustration with morons. I promise to properly update it soon, but until then lets use these simple numbers so everyone can understand...

If a bank charges a 10% annual interest rate on the money it lends, and loans are made for the period of 1 year AND THEY CHARGE NO OTHER FEES, the annualized interested rate (think APR on your mortgage or car loan) is 10 percent.

So 110% or $110 is repaid on a $100 loan. If the loan amount was $4,000 the amount repaid would be $4,400. Still 110%. Simple, straightforward right? OK.

Much microlending is done by community cooperatives, or "field partners," that you must be a member of to receive their benefits. If you want to join the cooperative you may have to pay a fee of $5 to join. This fee would entitle the new member to use the co-op offices resources. This could be use of computers, internet, access to business and legal counselors, as well as the ability to borrow money.

Kiva and other microlenders are though of as charities, these field partners are businesses

our borrower has paid her $5 membership fee, a $15 application fee and $10 closing on her $100 loan that carries 10% annual interest and is repayable over one year.

paid $140 back for her $100 loan. Wow, that is 140% or 40% interest.

loan amount were $4,000 she would have paid back $4,430. That is 110.75% of the borrowed amount, only an interest rate of 10.75%.

In the US, most loans are of a longer term than 1 year. So costs paid for obtaining the loan are amortized over a much longer period. A direct comparison between micro lending interest rates of 25% and the 5.75% APR you pay on your car loan isn't accurate.

What about the other benefits she receives once her loan is repaid? They are a little more intangible, but benefits nonetheless. What are they you ask? How about the pride of business ownership, the respect of her community and family, the ability to borrow additional money based upon her new credit status. She may also be able to send her child to school with the income from her new venture.

Well those are pretty important.

Would you like to tell me how wrong I am about microlending, micro loans, third world loan sharks or whatever you call it? Please feel free to use the form below to rip me a new one. ;)

Note: I will censor your language if it is too foul. Just to be polite.

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