Microfinance: A New Way to Invest
March 6, 2008 by Miranda Marquit
Filed under Finance
One of the trends hitting the investment world is microfinance. For most people, this is a way to make money by offering small loans to the poverty stricken to help them start business ventures. Microfinance isn’t new, but the growing focus on it is. Even eBay is now getting in on microfinance.
Another way to make money from microfinance is to join person-to-person lending communities like Prosper. Prosper has been around for a while, and it exists by helping people connect with other individuals. Lenders make money on interest and fees (usually higher than what is made on micro loans to the third-world), and borrowers usually have the benefit of consolidating higher-rate debt, such as credit cards.
But, as with all investment, there is risk. When you make a loan through microfinance, you are putting your money out there. If the borrower defaults, then you have lost your investment. I suspect, though, that the default rate is higher on Prosper loans than it is on micro loans to those in poverty…
Prosper seems really attractive in a way, but the returns are not as great as I would expect for such a high risk. Direct lending is much riskier than investing in a company in my opinion.
I agree that Prosper isn’t really my cup of tea. And, with all such investment programs, there are plenty of horror stories. I prefer to do my microfinance through nonprofits like Kiva or Grameen bank. There’s less risk, you put up less money (as little as $25) and you are truly helping someone in poverty. The returns aren’t as sexy, but I feel much better about it.