Lenders can now propose interest rates

Discussion in 'Announcements' started by Julia Kurnia, May 9, 2014.

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  1. Shehi

    Shehi Gold Member Volunteer Mentor

    @Mike
    A good example of my fear on lenders-setting-interest-rate is your interest rate & low amounts on most loans. It simply means you're too keen on spreading your risks quite widely to avoid a huge loss at the same time ensure maximum return with those who will repay responsibly.

    Your typical lending summarized = $3 x 300 loans x 15% . I simply understand you have low trust on new borrowers but you equally do not trust long-trusted members with huge amounts. Because $100 x 3 loans x 15% will have same result but would show you as much a gain-oriented lender.

    Now you see why this trend is worrying me greatly @Mike ? Just assume 1000 more lenders take your approach in few months to come. It would require every loan to get support of at least 40 lenders to fully-fund a $120 & at maximum 15%! Now imagine a $1,200 loan!
     
  2. Mike

    Mike Forum Member

    Hi Shehi,

    Sorry, I don't think that your characterization of me is quite correct. I seek to help the largest number of borrowers, loaning in some amount to virtually every loan posted. I think it's unfair to characterize that as simply "too keen on spreading your risk quite widely". How many lenders here loan to virtually every borrower? While I admit that it does diversify my risk to do so, my goal is to help the maximum number of people. How much do you really think I have to gain even at 15% interest on a 3.00 loan that lasts for 3 months?

    You also go on to state that I "don't trust long-trusted members with huge amounts". This is not true, either. When I first signed up for Zidisha I did do some large loans. Every one of them defaulted. So I changed my goal from helping a few people a lot to helping a lot of people in a more moderate sum. I don't loan more than around 25.00 to any one person anymore, but for borrowers with good history I do lend at much lower rates and up to 25.00, like these in the last few days:

    https://www.zidisha.org/microfinance/loan/abimawako/7956.html
    https://www.zidisha.org/microfinance/loan/amdiallo/6774.html
    https://www.zidisha.org/microfinance/loan/jmasongo/7793.html
    https://www.zidisha.org/microfinance/loan/Harrybayo/7572.html
    https://www.zidisha.org/microfinance/loan/josephmaina/7508.html
    https://www.zidisha.org/microfinance/loan/wandaka/7468.html

    On that first one, I charged the lowest interest of any lender on that loan AND I funded in a higher amount than any other lender.

    You seem to seek to characterize me as "a gain-oriented lender" but you fail to recognize the most important fact of all: lenders CANNOT profit on Zidisha. The losses from non-paying borrowers are too great. Despite my lending practices which you seem to abhor, I have lost hundreds already in written-off debt, and I will likely lose thousands in the long run based upon the loans I've made that are not repaying but not yet written off. When I say loss, I mean that if you take the interest that has been paid to my account by all borrowers, subtract the Paypal fees that I paid to get the funds into Zidisha, and subtract the amount of money that has already been written-off by Zidisha, I am short hundreds of dollars. I have never withdrawn or intended to withdraw a penny from Zidisha.

    Since this is true (I can personally attest that it is), commercial investors will not be attracted to Zidisha. They are not in this to help others, as I am. They're in it to make a profit, which is not something they can do here, net of all losses. That's why your concern is unfounded.

    I must respectfully disagree entirely with your assessment. I think Zidisha would do very well to have an army of lenders who lend the way that I do, bonding together to fund virtually every loan while being willing to take moderate shared losses to help other people. Don't forget that borrowers can wait and leave their loans open longer in order to have them bid-down, and they can also refuse to accept a loan funded at a higher interest rate than they desire. It costs the borrower nothing to do either of these. This does indeed leave borrowers in the driver's seat, and I can't imagine that anyone that I funded would have rather not been funded at all than to accept the terms that I offered.

    Are these your loans that I helped fund at 2% interest just a month ago and 3% interest in December 2013?

    https://www.zidisha.org/microfinance/loan/Shehi/7028.html
    https://www.zidisha.org/microfinance/loan/Shehi/4590.html

    The reason why my loan amounts are small is that you capped the interest at 2% and 3%, respectively. I've been running a business here in America for 20 years with a perfect financial track record, and a fully-documented unsecured business line of credit costs me 8.5%. An undocumented one (where I don't provide financials but still go through a credit check) would likely cost me 20% or more (I get offers for these all the time). That's a cost of doing business, and if my business can thrive while paying that, I don't see why yours requires a 3% rate while offering no collateral, financials or credit check. I don't believe I'm helping new entrepreneurs if my loans lead them to believe that they can only succeed with unreasonably low interest loans. Something is wrong with the business model if it will only sustain a 3% interest rate on borrowed capital, and since my goal is to help the entrepreneurs I am lending to, I think it's better to fix that broken business model than it is to have all future success depending upon perpetual loans at unreasonably low interest rates. After all on this very thread we discovered that even at the 15% rate Zidisha is still the lowest rate by far for undocumented loans with no collateral.

    Even if you completely repaid the loan at that 2% or 3% rate, it doesn't cover the lender's costs to participate in Zidisha. That's why the loan amounts are small; I seek to help as many people as I can, but at such a low interest rate I would end up helping far fewer people if I loaned a large amount under your terms. Please note that even at this loss-leader rate, I still wanted to help you and loaned something. Twice.

    I am not here to make a profit, I'm here to help people and to be a part of something good that's bigger than me. But we all have limits upon what we can and cannot do, and I strive to do the most that I can with what I have.

    Mike
     
    Last edited: Jun 7, 2014
  3. Shehi

    Shehi Gold Member Volunteer Mentor

    keep spreading the good @Mike .
     
  4. Wiredfox

    Wiredfox Gold Member

    @Mike & @Shehi
    Interesting conversation though going round some familiar old tracks. Mike is a good example of a 'glender' - he is depositing funds that he intends never to withdraw (although maintaining the right to do so). Why should 'losses' be of concern to him? The answer is that if the Zidisha model is working properly, the impact Mike can make on alleviating poverty grows exponentially over time, compared with other models where money is given 'one to one'. In theory the Zidisha model recruits 'good' borrowers as partners - the capital they repay and the interest charged is made available to future borrowers rather than being returned to the owner of the original capital. If a lender such as Mike behaves rationally (and there's every indication that he will) and the system encourages 'good' borrowers and seeks to eliminate 'bad' borrowers (ones that don't repay), then long established borrowers with good reputations can expect to receive preferential rates on increasingly large amounts of money, on the grounds that they are playing their part well in the system and should be rewarded. Mike's reward is the knowledge that his contribution is making a greater impact than would otherwise be possible. In this system the interest rate charged to a particular borrower reflects the cost of the benefit to the borrower of access to capital plus the risk they represent to future borrowers. Inflation within the local economy also has a role to play here (see other threads).

    As I've discussed elsewhere, I'm a 'glender' and I believe that it is the only rational way of using the the Zidisha model...
     
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  5. Shehi

    Shehi Gold Member Volunteer Mentor

    At last lenders' proposed interest are not shown to third parties on fundraising loans. @Evelyn , you're right Zidisha has changed this.
     
  6. Evelyn

    Evelyn Forum Member

    I don't understand this change and what Zidisha is hoping to accomplish by it. I'd rather be able to see what interest rate everyone is offering. I feel it is encouraging when I can see other lenders offering 0 percent, 1 percent, 2 percent or 3 percent interest. I hope it inspires other lenders to offer lower rates. I think it is better for lenders and borrowers to see how the bidding process is working. I'm not sure the reasoning behind this change, but I don't like this further lack of information and transparency.
     
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  7. Shehi

    Shehi Gold Member Volunteer Mentor

    An invitee has just confirmed that he too cannot see the offered interest rates on his fundraising loan! I hope it, at least , shows when he is accepting bids.
     
    Evelyn likes this.
  8. Mike

    Mike Forum Member

    I would agree, I hope that the borrower can at least see the interest rates to make informed choices about when to accept the loan and who from. I agree that showing the interest rates charged by each lender probably does help to lower interest rates overall; I have noticed that certain members here outbid me regularly with 0% interest, and I'm happy that the borrower is getting the best deal. I wonder why this was changed without any discussion or input from the community?

    Mike
     
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  9. Evelyn

    Evelyn Forum Member

    I looked at a loan that had bids from about 15 different lenders. The interest rate so far was 9 %. It is quite possible that only two people who are bidding a lot of money are bidding at 15 %. Maybe the other 13 lenders have bid smaller amounts at 0, 1, 2 or 3 %. I have seen this happen before.

    The 16th person, who could be a brand new lender, might see this and assume everyone is bidding around 9 % so they bid at 8, 9 or 10 percent. This is most unfortunate for the borrower who will wind up with a higher amount of interest to pay.

    I feel it is misleading to hide this info. I think it is very, very valuable information for this new lender to see that the majority of the lenders - 13 out of 15 actually submitted very low bids.

    I hope @Julia Kurnia will see that this discussion has begun in this thread.
     
  10. Wiredfox

    Wiredfox Gold Member

    Hi Evelyn

    You raise an interesting issue - what psychologists call the 'mimetic effect'. As humans we like, on the whole, to fit in with other people's behaviours, to 'mirror' what others are doing. So on Zidisha, is it better if the majority of lenders hang back and wait to see what others are doing and then go along with that trend, or act according to their own evaluations of the borrower's request? How much information is needed to satisfy each type of lender? Is it more socially useful if everyone lends at ultra low interest rates (with the risk of running out of money sooner) or if everyone sets a rate according to their perceived risk and to what they think the market will bear (in the hope of preserving capital for future borrowers)? How would Zidisha code for the optimum socially useful behaviour?

    An interesting research project!
     
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  11. Evelyn

    Evelyn Forum Member

    I just placed a bid on a loan and then went to double check that everything was correct, however I can only see the bid amount and not the interest rate of my bid because this is hidden for everyone including myself. Then I checked in My Impact to see my current bids. It only gives me my dollar amount. It does not give me the interest rate of my bid. So I can't tell if I made a mistake or if Zidisha correctly applied the interest rate I chose.

    @jonas @Julia Kurnia I would hope you would reconsider showing the interest rate information on everyone's bids again. But at least there should be a way that you can see if your own bid was made at the interest rate you intended.
     
  12. Julia Kurnia

    Julia Kurnia Director, Zidisha Zidisha Staff

    Thanks to you, Evelyn, to the others who have participated in this thread for sharing your insights on the implications of individual interest rate displays.

    We ceased displaying interest rates to third parties in order to protect the privacy of lenders. Our concern was that lenders should have the right to choose the interest rates that they consider fair, without needing to worry that their interest rate decisions would be viewed, judged and discussed by the entrepreneurs they are funding and by the public.

    It was an oversight on our part to remove the ability for lenders to view the interest rates of their own bids, and we have now corrected that such that lenders' own interest rates are again visible.

    I hope this helps clarifies things, and thank you again for your feedback.
     
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  13. Evelyn

    Evelyn Forum Member

    Thank you. I am able to see mine on the loan I wanted to double check.
     
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  14. Shehi

    Shehi Gold Member Volunteer Mentor

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  15. KirstenShute

    KirstenShute Gold Member

    In response to @Wiredfox
    and @Julia Kurnia
    ...as long as the average interest of all bids is displayed, I don't mind having the individual interest rates hidden. I think the average gives me enough information.

    As for lender behavior, I suspect we're all affected in some way by others' choices, but respond to them differently - Lender A might want to fund a loan because many other people have funded it, but Lender B might want to help someone with a less popular loan. Or, Lender C might see higher interest rates for one loan and charge likewise because s/he thinks the borrower is a greater credit risk, while Lender D might see the same loan and decide to bid at 0% to give that borrower a better deal.
     
    Last edited: Jun 13, 2014
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  16. Wiredfox

    Wiredfox Gold Member

    Sure, there's plenty of complexity in the system! I guess the point is how the systems 'learns' user behaviour and adapts to maximise the social utility of the platform.
     
  17. John Macharia

    John Macharia Gold Member Volunteer Mentor

    lets hope for the best .
     
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  18. Wiredfox

    Wiredfox Gold Member

    I'm optimistic :)
     
  19. Nathalie Karouni

    Nathalie Karouni Forum Member

    Hello guys,

    I am fairly new to lending, even though I've already lent to almost a dozen people in this website. I always charge zero interest because I don't see what's the point to make it harder for these people to repay everyone and on time? I know some of you will keep re investing the money and that is great, but why charge interest at all?
    I understand also that banks would charge way more, but can you imagine how do they end up having to pay back if let's say there's 30 people charging interest on one loan? That probably ends adding up as much as some bank loans.

    I don't understand where is the compassion to REALLY try to help people who are in need. I think it wouldn't be wrong to assume that most of these people are probably making in one year what a lot of us here achieve in half a year if not way less time.

    Does anyone have a good argumentation so I can understand?

    Thank you
     
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  20. Shehi

    Shehi Gold Member Volunteer Mentor

    Hi @Nathalie Karouni ,

    Most lenders charge interest to cover for PayPal costs & Forex losses.

    That way the original investment gets to be around for longer, provided repayments keep streaming back in.

    Thank you.
     
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