The Wall Street Journal
By: Jonnelle Marte
September 26, 2010
If you think "microlending" is just about helping a street vendor in India buy a cart or getting a new sewing machine for a seamstress in Tanzania, think again.
There are plenty of ways to help someone out -- and make a few bucks -- right here at home.
With lending conditions still tighter than they were before the economic downturn, many U.S. consumers are turning to microloans to help them consolidate debt, pay medical bills, start a business or keep one afloat.
A July survey of microlenders by the Aspen Institute's FIELD program, a policy and research organization specializing in microenterprise, found that 61% of microlenders saw loan applications rise in the first quarter, but many are having a hard time meeting the higher demand.
And that's an opportunity for small investors -- who can make microloans of as little as $25 directly to others through peer-to-peer lending websites or go through microlenders that pool investors' money to offer larger loans to individuals, businesses or community groups.
Returns on microloans can top 10% in some cases, but usually average 2% or 3%. Sure, you can get better returns with other investments, say, municipal bonds. But they're not too bad compared with the 1.2% average rate on one-year certificates of deposit and the paltry rates on money-market accounts, currently around 0.7%.
Indeed, short-term interest rates are expected to remain ultralow for the foreseeable future. And some believe the Federal Reserve is mulling another round of large-scale asset purchases intended to push down longer-term rates and stimulate the economy.
Of course, with microloans you run the risk of a borrower defaulting. And often, the process will tie up your money for several months or years.
Websites Prosper.com and LendingClub.com offer the most direct approach by allowing you to lend money directly to a borrower. You can bankroll an entire loan but it's more common for investors to fund small portions of a larger loan.
Both Prosper and Lending Club have a profile for each borrower, which includes the purpose and length of a loan, the interest rate and loan amount, and the risk rating given by the lending website.
Once you've chosen a loan or loans to invest in, you specify how much you want to put into each. Most borrowers ask for several thousand dollars, but investors can contribute as little as $25. Both sites encourage investors to reduce their risk by making small loans to several borrowers.
When Jennifer Stitzel saw the interest rate on her online savings account shrink to 1%, she decided to invest her savings into several peer-to-peer loans with Lending Club, primarily with people who are trying to consolidate debt or remodel their homes.
"It just felt like it was doing nothing. It was as good as putting it under my mattress," says Ms. Stitzel, who works for a medical-device company in Seattle and has seen her investment grow by about 13% since February. "I'm not a philanthropist. This is an investment for me."
Lending Club, which accepts investors from only 28 states, sets interest rates from about 8% to 25% based on the borrower's credit risk. The riskier the borrower, the higher the rate. On Prosper.com (which has lenders in 27 states), borrowers state the highest rate they're willing to pay and investors bid to fund a portion of the loan. Once a borrower has enough investors to fund the entire loan, those who offered the lowest rates win. (Investors are charged a 1% fee on both sites.)
One borrower in Connecticut, who is seeking to consolidate medical bills for his son, is currently asking for a $14,600 loan on Prosper.com with a maximum interest rate of 10.15%.
Lending Club says it has an annualized default rate of about 2% to 3% of loans. Prosper says about 1% of its loans defaulted in the last year, but estimates that will kick up to about 7% as loans mature.
Existing peer-to-peer loans also can be bought and sold on the secondary market via a trading platform operated by Folio Investing. On Prosper.com, you can buy and sell loans made after July 13, 2009. Lending Club offers a secondary market for loans made after Oct. 12, 2008. Sellers must pay a 1% trading fee.
Another microfinancing option is to invest in an institution that makes microloans to various groups, such as entrepreneurs, community-development organizations and low-income workers.
MicroPlace, a broker owned by eBay, lists various microlenders that cater to specific groups or geographic areas. For instance, microlender Accion Texas make loans to small-business owners in the state.
Loans made through MicroPlace start at $20. The average person invests $1,700, but some people have invested as much as $250,000, says Ashwini Narayanan, general manager of MicroPlace. Investors can earn between 1% and 3% a year on their investments and can choose the loan term, up to five years.
Meantime, some community-development banks and credit unions are getting in on the action as well by offering CDs that use your money to do some good while you earn interest. The Self-Help Credit Union in North Carolina, for example, offers CDs starting at $500 with rates of up to 2.5% on five-year terms. The money is used to make loans to businesses and nonprofits that support causes specified by the investors, such as organizations that help women improve their finances.