Photo (cc) by Magharebia
Check out our rates search and you’ll see 1 percent interest is about the best you can do on insured bank savings these days, with the average below half a percent. But as an investor on a site called Microplace, half a percent is just the starting point, and you don’t need much money to get started.
On sites like Microplace, you make microloans to entrepreneurs around the world — usually in locations where there’s no easy access to banks and financial services, especially for the poor. No ATMs, no credit cards, no insurance – according to Microplace, this is how 40 percent of the world lives, on as little as $2 a day. The idea behind these small, short-term loans is to help people out of poverty with business loans that spur entrepreneurship and provide stability.
In the video below, Money Talks News founder Stacy Johnson speaks with Microplace investor Barry Ross, who’s thrilled with both the concept and the 4 percent he’s earning on one of his short-term loans. Check it out, and then read on for more details about how microloans work.
As Stacy mentioned, Microplace says they’ve never had a loan go into default. (They’ve been around since 2007.) But that doesn’t mean this is a risk-free investment, and it’s certainly not the only thing to know about Microplace. Here’s a breakdown of how it works…
Chain of protections
The path your money takes to get to the cause you want to support has built-in ways to reduce risk, because at each level is another party who is interested in making sure everything checks out. First there’s you, the investor – you contribute the money, so you’re hopefully going to take a careful look at how this all works, including looking at the user agreement and the prospectus of any loan issuers you consider.
Then there’s Microplace, the platform – they set up the transactions and evaluate potential loan issuers based on these criteria. While you make interest on your loan, they also get a 1 percent cut from the loan issuer, and of course it’s their reputation at stake if anything goes wrong.
Issuers evaluate and monitor applicants and make the actual loans to microfinance projects, and as Microplace explains, “Ultimately, issuers are on the hook for your money. So they make sure that the projects they choose to support are financially able to repay any loans provided.”
Projects can range from supporting farmers in Costa Rica to training and education for female entrepreneurs on the Ivory Coast. Pick, and you’ll see the fixed interest rate and how long your money will be tied up.
Despite the success rates and the protections just mentioned, this investment has risk like any other. Loan issuers take a careful look at projects, usually diversify their portfolios, and keep cash reserves. But if something goes wrong you could lose the interest and/or the principal you contributed. Each issuer has different policies, so look at the prospectus of each before you decide.
Getting money back
The lowest interest rate on the site seems to be half a percent and the highest is at least 4 percent, according to Ross in the video above. Some prospectuses we looked at suggest rates as high as 5 percent, but we didn’t spot any current opportunities that high.
Most issuers make interest payments quarterly, and the money goes to the account you contributed from (bank account or PayPal). When your investment reaches maturity (each one will list its end date, ranging from about six months to a few years) you can opt to get your money back or redirect it to another investment. If you don’t specify you want your money back within 30 days of the maturity date, Microplace will reinvest it for you.
If you’re an American adult with $20, you’re set. That’s the minimum investment for projects all around the world. There are no fees to investors – they just have to be 18 years old and a resident in the 50 states, D.C., Puerto Rico, or the Virgin Islands. (But the investment opportunities available do vary depending on where you live.)
Protecting the poor
Microplace is very clear that “100% of your money is used by microfinance projects to provide financial services to the poor. Your return and our fee are paid by the issuer who makes loans to the microfinance projects.”
And while the average interest rate charged by a microfinance institution is 35 percent, that is mostly used to cover administrative costs – including traveling to remote areas and working closely with the borrowers to make sure everyone comes out ahead. Plus, Microplace is picky about who it does business with. From their section on protecting the poor: “Microplace does not condone institutions that are profiting at the expense of the poor. We select issuers who are in the business of raising money for projects that are focused on their social mission.” So you can feel good knowing you’re making a difference abroad and in your bank account.
If you’re looking to beat your savings rate or make the most of your charitable nature, microloans might be a good option for you. But don’t miss the other investments we’ve explored to earn more – check out…