Tag Archives: credit union

P2P Finance FTW

As many will recall, there was a push to move your money from banks to credit unions last November 5th.  What was called Bank Transfer Day.  It was, and is, a good idea for a host of reasons that I am not going to get into here.  Suffice it to say that I supported it, and if you didn’t do so then, it is never too late!  By some accounts Bank Transfer Day was quite successful.  The question is, as with so many in our short attention span culture , one of continued success.

However, another way that we can help ourselves in the financial realm is through microfinancing, and particularly peer-to-peer lending. Make no mistake about it.  Finance and politics are inextricably linked for as long as we are living in a capitalist system.  The only questions we have in that regard is how and to what extent.  Do we continue to maintain the course of the last 40 years until we sink or do we alter course now while we might still save the ship?

You may have heard of the Grameem Bank.  In short, it dates back to 1976 when Professor Muhammad Yunus started a system whereby very small loans were made without collateral to the very poor.  His reasoning was that their skills were under-utilized and under-valued.  Through these loans, they would be able to survive and even lift themselves into better circumstances.  (There is much more, including some criticism to know about the history and theory, of course.  You could read more about it using this as a jumping off point.)

The Grameem Bank was the modern beginning to a system that actually goes back hundreds if not thousands of years.  Since then, a number of other organizations have spread the same concept around the world.  Essentially making credit available to people living in a capital driven society to whom that credit would not otherwise be available.  Professor Yundus is a perfect example of finding a way to use the system against itself.  Instead of seeing the problems and throwing his hands up, then walking away, or only providing support and not also providing rehabilitation, he found a way to tweak the system to provide both.

And, the kicker is that he did so using the social structure he was in so that those borrowers are also committed shareholders.  Just like in the credit union model.

Okay, so, what’s the point?

The point is that this is, I believe, another way that we can and should be helping ourselves for the future as well.  “What?”  Yes.  Through microfinancing as a way of investing for the future.  The individual investments, financially speaking, can be small and the returns can be on par with mutual fund averages.  However, the social investment ratio is higher.

If you have been reading along for a while you may recall that in December I posted about “Empower United” .  I thought that they, too, might be part of the way forward.  However, as I wrote, I believe they are just more of the same.  Their marketing materials are high on promoting social values, but that’s gimmick.

Microinvesting via peer-to-peer lending is a particularly good option for the younger generation to get involved in.  A small amount put in now, and done consistently, even a small return will add up through time.  However, even for those of us in our 30s and 40s with expected lifetimes, if we did this now, it could have a fair return, and with the social investment component, it is well worth it!

In a nutshell, here’s how it works.  You choose to invest small amounts of money, as little as $25, for example.  You select which loan to invest in.  The service you are working through will then actually make that loan and handle all of the collection activities, etc.  There are obviously more complexities, right?  Sure.

So, let’s say someone wants to borrow $10,000.  The facilitator bundles each investor together to reach that level.  However, not every loan will be funded.  Because they are investments, people have to actively choose to invest in that particular loan.  As such, if time runs out, that loan might not be made.

Now, there’s obviously the other side of the coin.  The borrower.  Who is borrowing from these microfinance groups?  Typically in the US the borrowers are people who for one reason or another either cannot qualify for a typical loan from a bank or would rather not go to a bank.  This does not necessarily mean that they are a poor credit risk.  Many of the loans in the US are for debt consolidation, for example.

I am focusing on the US, but know that there are similar options around the world.  One of the reasons I am focusing on the US is because the other options I found around the world, you actually had to live in those countries, and since I don’t, I didn’t fully investigate them.  I am aware of the following 4 options available to residents of the US.

Option 1 Kiva

Kiva is charity only.  There is nothing wrong with this.  In fact, I recommend it.  But, as an investment strategy it has one huge flaw.  There is no financial return on investment.  Still, it is a good system.  It works exactly the same way.  You can select from a variety of loans around the world.  You will have information about the location, person, the need, and the sponsoring organization.  If you are investing a small amount, your loan will likely be used to back fill a loan that has already been made.  As payments come back in, they’re credited to your account.  Eventually, you can choose to be repaid or you can choose to reloan your money out so that it can continue to help others.  Kiva does ask for donations to continue funding their operations.

Option 2LendingClub

We bring you a more efficient model.

By allowing our members to directly invest in and borrow from each other, we avoid the cost and complexity of the banking system and pass the savings on to you. Both sides can win: better rates to borrowers and better returns to investors. It’s that simple.

LendingClub is the oldest peer-to-peer lending.  It first appeared in 2008, and appears to have been going strong since.

Option 3Prosper

Peer-to-Peer Lending Means Everyone Prospers

Prosper is the market leader in peer-to-peer lending—a popular alternative to traditional loans and investing options. We cut out the middleman to connect people who need money with those who have money to invest…so everyone prospers!

Prosper started in 2006 as an Ebay style loan auction site, but in 2010 changed to a peer-to-peer lending and also seems to have gone strong ever since.

Both LendingClub and Prosper list loans only in the US.  There is really very little difference between the two of them.  Both appear to be solid services, as far as they go.  Both report roughly the same returns, financially speaking.

The one thing that I do not like and that for now there is no getting around is that both Prosper and LendingClub are affiliated with Web Bank.  Now, Web Bank is, as far as I know right now, not the worst of the bunch.

Option 4microplace

microplace has the highest social investment ratio, but the lowest financial return.  Still, starting early, and/or including it as part of an overall investment portfolio, it is excellent!  What they say about themselves is:

unleash your portfolio’s potential

Imagine a world in which you couldn’t get cash from an ATM, use a credit card to buy a sandwich or to get insurance to cover medical emergencies. Daily life would become much more difficult without the financial tools most of us take for granted. Unfortunately, 40% of the world lives in poverty with no access to such resources for managing their financial lives.*

You can help change that. Use your portfolio to finance a project that enables the working poor to move from subsistence-level living to managing their money– all it takes is access to basic financial resources. You get to invest in something you believe in while making your money back with interest!

*source: Portfolios of the Poor Jonathan Morduch, Daryl Collins, Stuart Rutherford, Orlanda Ruthven

Again, you invest small amounts, and the payments trickle back in.  Unlike Prosper and LendingClub which boast average returns around 10% and claim riskier possibilities of returns higher than that, microplace returns are projected at 0.5 to 3.5% level.  Also, unlike Prosper and LendingClub, these are all outside of the US.  Again, though, this should not be seen as strikes against microplace.  Only factors to consider in building a balanced approach to a socially responsible and diverse investment approach.

If we are serious about Bank Transfer Day, and we are serious about taking back our country from the tyranny of wealth that has developed, and we are not yet ready for a radical revolution, then we have to be looking for ways to take control of the system to the masses.  This is, I believe, one step in that direction in terms of the financial system.

Let us not forget it wasn’t just banks, but also investment firms, and specifically the removal of Glass-Stegall allowing the blurring of the line between the two that was perhaps the largest single contributing factor to the financial crisis we found ourselves domestically over the last 5 years.  That was the end result of policies of the last 40 years, of course, but nonetheless, it should not be forgotten.  Peer-to-peer lending takes some of the money out of the hands of these same investment firms from both sides.

Necessary disclaimer:  I am not now, nor have I ever been a financial expert or advisor.  This is my opinion based on my research and my opinion.  I stand by it, however, you must make your own decisions.  Should you choose to act, understand that these ARE investments and therefore come with some risk.  The amount of risk varies depending on the specific investment made.


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