I will address this subject in two parts.
From a personal access point of view, a microloan works as follows:
- 1) You, or another individual that has extra money that he or she wants to invest, goes to a microloan broker. This usually happens through their website. Several common brokers are listed below.
- 2) You perform a search to narrow down what you would like to invest in based on geographic location, investment minimum, and the business type/model.
- 3) The loan note is issued to you through a separate lending organization (not the broker).
- 4) The loan is repaid by the individual in the developing country to the lending organization.
- 5) The lending organization then repays you (including interest) through the brokerage house.
Several of the providers (they are officially classified as brokers and are registered as such) that I have heard about can be found at the links below.
What kind of return can I expect?
Generally, the returns of these investments of pretty low. Currently, a one year loan on Microplace.com is earning a 3% rate of return.
While this is not stellar, I consider it a very good sign for several reasons.
- First, it is probably a realistic estimate due to the increased risk with this type of investment being counterbalanced by high interest rates charged to the borrowers.
- Second, and maybe most importantly, it is currently double what I am earning on my online money market savings account (1.4%). So, it is not all that bad when you think about it!
How is the payback reliability of microloans?
As I was investigating this topic today, I was shocked to find out that microloans actually have a 97% successful payback rate.
This is truly an awesome find! I think it is also proof that people are more motivated to do well if they are treated with respect.
By giving poverty stricken individuals a loan (instead of a donation), they are being instilled with responsibility. It is a pretty cool thing!
My experience with microloans
I always like to add a little human element to my postings whenever possible. This helps it keep this blog alive and not be a dry Newsweek article.
Since this was my first ever microloan, I started with a small $20 loan with Microplace.com. I choose this broker because they are supported through eBay / Paypal, two companies I trust.
The loan note was actually issued by the Calvert Foundation. This organization is a non-profit group that issues community (meaning multiple lenders) loans to help fight poverty. Looking at their website, it actually looks like it would be a pretty cool company to work for for finance majors!
The audited financial statement of the Calvert Foundation can be accessed at the link below.
Details of my loan are as follows:
- Repayment in less than one year (Jan 2011)
- 3% annual interest
Since I just made the investment, I haven’t received any interest payments to date.