How to Determine Which Micro-loans Are a Good Investment
Micro-loans are peer to peer loans for amounts from $50 to $5,000. On some peer to peer lending sites, the loans can be as large as $50,000. These are loans that mainline banks do not provide because they are too small to be profitable.
Micro-loans via peer to peer lending are increasing via individuals that cannot get loans due to tighter lending standards, spiking interest rates that prevent financing small projects via credit cards and higher interest rates on new loans. There has also been a rise in third party peer to peer lending sites like kiva.org and prosper.com.
Investors benefit from lending through these peer lending sites instead of direct personal lending for several reasons. First, they gain a much wider pool of investment options than their immediate circle of friends and family. Secondly, they have the ability to see ratings on borrowers that may not be available from loaning to a distant acquaintance. Most importantly, lenders can gain collections assistance through the third party lending sites as well as billing and payment information generated by these sites, saving the lender time.
Reminder: The only consideration for lending from an investing perspective is the likelihood of repayment, on time and in full.
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Do they have a solid plan of action? If they are consolidating personal debts at a lower interest rate, have they indicated how they will pay off the debt? In contrast, many individuals who get second home mortgages to consolidate debt get further into debt because they have not broken the debt habit. If borrowing for a business project, do they show an in depth knowledge of the business, their market, their product and the customer? Do they have a good business plan?
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Do they have credit worthiness? While individuals cannot see the FICO scores of others, you can review their reputation online. Warning: If the reviewers have account creation date or are new, be wary of the value of the reliability of the raters. One may create a positive review to bolster their odds of getting a better interest rate. Also look for cross-reviews of two borrowers recommending each other to boost their rating.
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Do they have a payment plan if the business plan fails? Do they have a side job or fall back job to be able to make payments if the business goes under?
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Tips & Warnings
The only consideration for lending from an investing perspective is the likelihood of repayment, on time and in full. Investing based on the quality of the narrative or emotional weight of their need is unwise if the objective is to make money.
Check for other loans by the same individual on the same peer to peer lending site as well as other sites. This should decrease their creditworthiness, since it indicates a higher risk to the lender.
If concerned about cash flow, invest smaller amounts in multiple loans or small amounts in shorter term loans. This will generate a steady cash flow less likely to fail than a single large loan that may not be paid on time.
If they state they have a business plan and will not share it with prospective lenders, stay away.
Do not loan money you cannot afford to lose. Peer to peer lending can have a higher pay back than investing, but it also has a higher risk.
If the website's company is not registered with the SEC (Security and Exchange Commission), the loans are not salable commodities. You cannot get out of the loan by selling it to someone else.
