At around the same time last year, I put money into Prosper, a loan service for peer to peer loans, and Kiva, a micro loan service for third world countries. While these might not be exactly similar businesses, one's more investment and one's more charity, I actively got involved with them both as a way to help people that need money. After all, I'm investing the same thing into each; my money. So who gives me a better "return" on my investment?

Prosper

My intention with Prosper was to help out people by loaning them money at rates the banks probably wouldn't give them and to get returns that were better than the stock market average, which we'll say is 12% for comparison. Anything less than 12% and I'd be effectively losing money since I've been getting great returns on my stocks. I also thought it would be slightly less risky than the stock market, but we'll soon see that that isn't true at all. In all I put in $500 and made 12 loans of ~$50 each (some were made from interest payments that accrued). So far I've had one loan paid off in full that I was able to roll back in and have earned about $45 on interest. The average interest rate on the loans has been 16%, which is above the 12% I was shooting for. Sounds great, right?

Not so. I've actually had one loan default (I was able to collect $2 on a $50 loan) and two others look to be on their way to defaulting. Even if they don't this one default, factoring in the loss, cuts my rate of return down to about 11%. With the others on their way to defaulting, I'm expecting now to maybe break even or take a small loss. I understand that these kinds of loans were risky, but I never thought they'd be this risky. I'm also surprised at the number of people that seem to want these loans to improve their credit score and then default and make their credit score tank even more.

Many of these borrowers on Prosper seemed to really need just a little help in getting out of credit card debt or getting back on their feet after a set back. I'm willing to help people out like that but it seems that Prosper is not the place to do it. I'm effectively hurting their credit more by giving them these loans because they're just going to default anyway and there's obviously a bigger underlying problem that they haven't been able to handle yet. So at the moment, lending on Prosper isn't helping me and it's not helping them.

I understand that there are people on Prosper that this is helping, but there's an underlying wheat/chaff problem that is nearly impossible to solve given the Proser tools. I've only loaned to people that have no bankruptcies or late payment notices and I'm still getting burned. That makes it a crap shoot and the value to stick with it just isn't there.

Kiva

My intention with Kiva was to help out people only. Kiva pays no interest to the lender and Kiva's Field Partners charge interest to the borrower in order to keep the lender's offices running, but I'll see none of that revenue. But any money I put in will be paid back to me, at which time I can either take it out and keep it, roll it back into another loan or donate it to Kiva. So far I've loaned $200 to eight different loans of $50 each. Some of my loans are: Sy Tha Prom from Cambodia to buy a new taxi cart, Mercy Wambui Kamanda in Kenya to buy produce and seeds to sell in her market, Adelaide Duah in Ghana to buy supplies for her bakery and Dilorom Kasimova in Tajikistan to set up a new shop for her seed business. Sound risky?

I have had these loans out there for as long as the Prosper loans and have not had a single default or late payment. In fact, Kiva states that it's repayment rate is 99.78%. Why is it that poor third world countries can pay back loans and Americans can't? I guess we'll never know but Kiva is working exactly like I hoped it would. And the important thing is that my small loans are making a huge impact on the live of these individuals and their families. I don't think we realize just how valuable the US dollar is in these other countries. The value they're able to get out of this money, both economically and personally, is way more than the 12% return I'd get from the stock market. These are fundamentally life changing loans, and it doesn't cost me a thing!

My Prosper loans won't fully be paid off for another few years, but as the money from Prosper comes in, I plan on rolling that right into Kiva, as loans and donations. I encourage you to do that same. It will cost you nothing and your ROI will be the knowledge that you are really affecting someone's life for the better.

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This entry was posted on Friday, July 13th, 2007 at 11:04 am by Joe and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.