Economics

Microloans in the U.S.A.

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Markets and credit can make nice things happen, from the Washington Post, with this story of a pet care business seeking a loan and turning to:

the Latino Economic Development Corp.'s nascent microlending program, part of a growing network of financial institutions that specialize in small loans to mom-and-pop operations that are often below banks' radar. The average size of the LEDC's loans is $10,000 at a 10 percent interest rate, said Lending Director Rob Vickers. Many banks will not consider loans less than $200,000, he said.

Microlending first became popular as a form of foreign investment in poor, emerging markets. Before joining the LEDC a few years ago, Vickers was a microlending specialist in Latin America for the World Bank, including financing projects in Nicaragua to help rural villagers connect to electrical grids. The trend has been slower to take off in the United States, especially because many consumers have access to credit cards and because lending requirements were lax…..

the staff members at the LEDC were surprised that [pet care entrepreneur Ryan Fochler] could not qualify for a bank loan when he approached them two years ago. He reported record sales each year, with growth rates averaging 170 percent. The pet day care is profitable. Fochler employs 25 people and recently added dog training to his services. But he said that after the financial crisis, banks not only wanted to see profitability, but also matching assets.

At the LEDC, Vickers said staff members consider not only standard criteria such as credit scores in approving loans but also the entrepreneur's ability to pay. The LEDC requires all applications to go through credit counseling to be approved and scrutinizes companies' balance sheets. And it helps borrowers separate personal expenses from business ones, typically a tangled web for small-business owners….

Still, the tough economy has taken a toll on LEDC loan holders. The repayment rate fell from 100 percent in fiscal 2007 to 92 percent in 2009, Vickers said. Nationally, 69 percent of microlenders reported an increase in the number of workouts with customers, according to the Opportunity Finance survey.

Yes, the free play of loans at mutually agreed terms can make the world a better place. To see that same theme played out in a more controversial arena, see Katherine Mangu-Ward's Reason magazine feature from October 2009 defending payday loans.

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  1. I’ve been using Prosper.com for awhile now, and I like it.

    Microlending that doesn’t steal your profits (like Kiva does)!

    They went through a rough spot with the SEC because it’s essentially an unregulated derivatives broker, but I think they’re out of the woods on that now.

    1. Meh, I use Kiva and I don’t mind there isn’t any profit in it for me. I just think it is pretty nifty that I’ve helped fund business people from all reaches of the globe (espcially one guy who said his operation was getting harassed by the local government, automatic loan “donation” for him).

      1. It’s not really ‘lending’ if you never get paid back, is it?

        I consider what Kiva is doing to be either mislabeled charity or outright theft.

        1. You get paid back, you just don’t get interest.

        2. What Hazel said. I usually get some money back at the beginning and end of the month, which I then keep loaning out (but I could take it out of Kiva if I wanted). I’m just missing out on the interest the microloan agencies are getting, which I’m not really concerned about.

  2. Microcredit is a megafraud. Poor people don’t need debt, they need good jobs.

    1. Or capital.

      1. Yes. Capital leads to capitalism. Which is evil. Everyone should work for someone else.

    2. Yeah, owning a profitable growing business won’t get you out of poverty. Only McDonalds will.

    3. Most small businesses in this country use debt to launch their operations.

  3. Thread Jack.

    What the fuck is Barney Frank doing?
    http://www.streetinsider.com/I…..Mortgages+(JPM,+C,+WFC,+BAC)/5419026.html

    In an attempt to avoid a deepening crisis in the U.S. housing market, House Financial Services Committee Chairman Barney Frank has informed the four largest mortgage lenders in the U.S. to write down second mortgages.

    A letter was sent by Frank, a Democratic Representative from Massachusetts, to the CEOs of JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Wells Fargo & Company (NYSE: WFC) and Bank of America Corporation (NYSE: BAC), which was dated March 4, that said that losses on second mortgages are going to be necessary to allow first mortgages to be modified.

    Frank told the banks that this was critical to ensure future stability in the U.S. housing market and to stop the widespread foreclosures.

    Okay, since when is it Barney Frank’s job to tell banks what sort of loans they should write off?

    Do Geithner and Bernanke know about this shit?

    1. Probably since about the time the banks became state-privileged parasites, also known as several hundred years ago. Given that a bank’s profits are gotten entirely through the state-granted privilege to lend out money the bank doesn’t actually have (which is known as “fraud” or “counterfeiting” when us lowly serfs do it), protesting government interference in their operations makes about as much sense as protesting government interference in the goings on at the DMV. It’s roughly equivalent in absurdity to protest signs which say things like “keep your government hands off my medicare”.

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  5. Underwriting for short term or micro loans is very complex. You can not use regular FICO and prime credit scores to grade risk.

    If consumers have access to prime credit, they will not even apply for short term loans. Since they are likely to have a sub 600 FICO, the underwriting is more about Identify verification, income verification and debt to income. THEN, when you figure that out – you need to make sure they are in the group of people that get paid back at the end of the month.

    Microlending has not taken off in the US, not for lack of demand. Instead, for lack of a way to make a profit. The closest thing we have to microloans is the short term loan marketing, which is a much higher interest rate then is expected in micro loans. Only for the fact that the underwriting will be very close in nature.

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  7. It’s good that microlending is so affordable today. Finally small business owners have what to choose from because there are alternatives to traditional bank loans. Starting a business is not that easy and quite often consumers need personal loans to finance their startups. To get a bank loan it’s necessary to have an excellent or good credit score but as far we know there are many people whose credit is not really good. Government understands that small business is a backbone of the economy and it’s necessary to support it. And that’s why financial assistance is more affordable today and it helps small business owners to stay afloat.

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