Lenders can now propose interest rates

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

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  1. Mike

    Mike Forum Member

    Hi Nathalie,

    As a Kiva, ex-pat, I had to confront that issue too. However, unlike Kiva, even with the maximum interest rate at Zidisha it winds up being generally less than half of the interest and fees that Kiva's MFIs charge. On the other hand, lenders often take heavy losses here which is not true of Kiva. This is directly because of the high interest rates the MFIs charge there; the MFIs will repay loans at 0% interest themselves to keep the free money flowing from folks like us. I would not be able to lend anywhere near what I do here if I couldn't offset at least some of my losses with interest.

    To more directly respond to your question, I'm here trying to help small business entrepreneurs succeed. Aside from what I just said about comparable interest rates (Zidisha is still the lowest in the marketplace in most cases), a business needs to be sustainable over the long term. It won't be if it relies upon free capital going forward to sustain operations; it would run only as long as that charity keeps flowing, and then would inevitably fail as soon as it stops. In my view, we could do more harm than good if we led new business owners to believe that's how it's done or enabled that kind of thinking.

    There's a big difference between lending to impoverished borrowers because they can't get good loan terms elsewhere, and simple charity. A reasonable interest rate will encourage good business practices in the long run such a thrift, proper product pricing, savings and even early repayment when it's affordable to save on interest, and will not encourage dependence. These are the same skills that first-world entrepreneurs learn if they are to survive.

    I also think that the best borrowers are those entrepreneurs who are not looking for a handout, just an opportunity. They want to succeed on their own, and paying reasonable interest not only helps to offset Zidisha's costs and lenders' losses, it also helps the borrower to accomplish his/her goals on their own without feeling like they could not succeed without charity.

    I'm sure there are other opinions! This is just mine. One of the great things about Zidisha is that you and I can loan to the same borrower, under different interest rates, with different goals and for different reasons. We can each accomplish our own objectives while cooperating to help others.

    Regards,

    Mike
     
    Last edited: Aug 18, 2014
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  2. qt9998

    qt9998 Gold Member

    Nathalie,

    To be perfectly blunt (my style), if you lend at 0% you will eventually lose all your money. If you're ok with that, fine. But even lending at 15%, you will be lucky to retain all of
    your invested funds because it only takes one defaulter out of 20 borrowers to wipe out the interest you gained. And that doesn't even take into account Paypal charges and currency losses. But with judicious selection, you can certainly do better and should be able to lend your funds over and over for a long time. That sure is preferable to hand outs.

    Borrowers are happy with Zidisha because otherwise they would pay 50% or more in interest assuming they could even get a loan with an MFI. And, not to forget, there's a reason
    why MFIs charge so much. Life is tough in these countries, but we nonetheless have to think in terms of sustainability as Mike pointed out.
     
    Last edited: Aug 19, 2014
  3. Evelyn

    Evelyn Forum Member

    Hi Nathalie,

    Welcome to Zidisha. I have been lending here for 2 years. So far I have always charged 0 percent interest. I have found that when a person repays 100 percent that sometimes it is over by a few cents and sometimes it is a bit less due to currency exchange. So overall currency exchange gains and losses cancel each other out. Where I lose money is when someone does not repay in full. I chose not to pass that along to other borrowers by charging interest. I assume the loss myself. I only fund my account a little bit from time to time. I don't like having the loss, but I also would feel bad to have a borrower pay me more than I loaned to them. I once had a 0% interest $20 loan to someone and had more than a dollar in currency exchange gain returned to me. I felt bad about receiving the extra dollar and wished I could have given it back to her. So I understand your point of view.

    Evelyn
     
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  4. qt9998

    qt9998 Gold Member

    A $10 bid on a loan @10% for a term of 4 months = US 0.33 cents. Do the math.
    If 30 lenders do the same, the borrower pays a grand total of $10 on a $300 loan.
    There isn't a borrower out there who would refuse such a loan.
     
    Last edited: Aug 19, 2014
    Shehi likes this.
  5. eric

    eric Gold Member Volunteer Mentor

    Hello Nathalie,

    I hope you should consider lending at an interest like other lenders do it to continue lending in long run.You can choose the minimum rate to lend to so as to cover losses that are incured in lending such as dollar fluctuation,few non repayment and paypal charges.Remember you are not donating but lending so any loss will affect you lending power in future.

    Thank you,
    Eric
     
    Shehi likes this.
  6. CMK71

    CMK71 Gold Member

    This is a very interesting discussion. I have been lending for a couple of months, and first started at 0% interest, sometimes to drive down the average rate. I now tend to lend at 3%, which seems reasonable to cover currency fluctuations and unexpected repayment failures (e.g., death of a borrower), while not being prohibitively expensive when the 5% fee is added in. Eight percent total feels reasonable to me. However, I will need to look at this again in a few months to see if it is actually covering the costs. I spread my loans around because I like to help many people and getting a borrower to 100% is kind of fun, but I will look more carefully at repayment history before funding a second loan to a flaky borrower.
    Christy
     
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  7. Esther Kanini

    Esther Kanini Forum Member

    Its good that the lender chooses an interest rate that covers any remittance expenses for the sake of sustainability of amounts due for lending.At the end of the day the rates are way more affordable than what other institutions would offer.
     
  8. KirstenShute

    KirstenShute Gold Member

    It's not exactly a matter of the interest adding up, but of being divided. For example, let's say Alice and Bob fund Carol's $50 loan. Alice lends $40 at 5% interest and Bob lends $10 at 10% interest. If the loan is a year long, Carol will repay Alice $42 (40 + 2) and Bob $11 (10 + 1), so that's $53 in all - only 6% interest on average, as it turns out. This doesn't count the five percent fee Zidisha charges; with it, Carol's total repayment will be about $55.50.

    So if you see a loan that so far has an average interest rate of 7% and you lend your money at 3%, you'll actually lower the total average interest. Even more so if you lend at 0%! But some lenders prefer to charge a small amount of interest, as I do (less than 10%), to cover fees and losses.
     
    Esther Kanini likes this.
  9. Esther Kanini

    Esther Kanini Forum Member

    Sure interest rate charged by lender only applies for the portion of the loan he has offered to lend , therefore an average interest rate as opposed to cumulative total applies on the total loan borrowed.
     
    John Macharia likes this.
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