Kiva lending basics for newbies

Discussion in 'Kiva | Loans That Change Lives' started by YULtide, Nov 4, 2013.  |  Print Topic

  1. YULtide

    YULtide Gold Member

    Messages:
    2,745
    Likes Received:
    10,554
    Status Points:
    10,520
    Thought I'd start a new thread to help out new lenders. There's so much to learn, and probably too much to put in one post, but here's a start...

    Choosing a loan:

    Every lender has different interests and ideas about what kind of loan they would want to support, but in general with the vast number of loans on Kiva at any given time, the choice can seem paralysing. So here are a few tips on how to choose a loan.

    There are a number of tools to narrow down your search for loans. First are the sector filters on the left of the loan list. You can also choose loans by country with the map at the upper left.

    On the upper right of the loan list is a drop down menu to select the way the loan list is sorted. The default is "Popularity" but you can also sort by Loan Amount, Repayment Term, Most Recent, and Expiring Soon, or you can choose "Random".

    Once you have selected a loan that you think you would like to support, take a look at the information on the right side of the loan desceiption page. You will already have looked at the photo and the loan description, but there are other factors to consider.

    Repayment Term might be from 5 months to 10 years. How long you want to tie up the funds you lend is your choice, but do make a choice Many lenders prefer terms from 6 months to about 14 months so the funds are repaid and can be relent in a reasonable time frame.

    Repayment Schedule might say "Monthly", "Irregularly" or "End of Term". This is closely related to repayment term. You can get detailed information on the schedule from the Repayment Schedule tab above the loan photo.

    Look at the Field Partner information as well. In addition to the number of stars, you can get a sense of the risk profile of this partner by looking at how long they have been posting loans on Kiva, delinquency rate and default rate. Of course, prior performance is no guarantee of future results, but it's useful information. Over time you will lose money on Kiva, but you can minimize risks by staying away from riskier-looking field partners. Or you can choose to make a loan in spite of it feeling more risky if the cause seems worthy to you. Your capital, your choice.

    To explain the numbers:

    Delinquency Rate is the amount of repayments overdue divided by the total amount owing.

    Loans at Risk is the number of loans delinquent divided by the number of outstanding loans.

    Default Rate is the amount of repayments defaulted divided by the field partner's total amount repaid.

    It should be noted that delinquency is common, but does not generally lead to loan default. For a variety of reasons a client might underpay, or miss a payment and then need to catch up later. The effect is that repayments are delayed, but the vast majority of clients do ultimately catch up on delinquent loans.

    ...more to come.
     
    Last edited: Nov 6, 2013
    canucklehead, milchap, kiwi and 2 others like this.
  2. YULtide

    YULtide Gold Member

    Messages:
    2,745
    Likes Received:
    10,554
    Status Points:
    10,520
    Incidentally, this would be a good thread for newbies to post questions.....
     
    miles and smiles and kiwi like this.
  3. YULtide

    YULtide Gold Member

    Messages:
    2,745
    Likes Received:
    10,554
    Status Points:
    10,520
    Understanding the financing of pre-disbursed loans

    The vast majority of loans on Kiva are "pre-disbursed". That is, the client has been granted the loan by the Field Partner and has received the proceeds prior to the loan being posted on Kiva for funding. Occasionally this arrangement is misunderstood as meaning that Kiva lenders are not in fact funding the loan they think they are supporting. This sometimes leads to accusations that Kiva is in some way running a scam. But there is no scam going on. It's important to understand the whole loan process with pre-disbursed loans. (Post-disbursed loans are a separate topic).

    Normally with a pre-disbursed loan, as suggested above, the client applies for and is granted a loan prior to the loan being posted on Kiva. Often the loan terms for a Kiva-specific loan may differ from the Field Partner's usual loan terms. This is possible because the capital that the Field Partner is using to fund the loan is interest-free and the default risk is assumed by the Kiva lenders, so the FP is able to pass along the savings to the client in forms such as lower interest rates.

    The loan proceeds are paid out to the client by the FP in anticipation that the FP will receive the loan amount from Kiva lenders. The loan is posted on Kiva and, usually, Kiva lenders support the loan in $25 slices within a few days. Thus the money for the loan is replenished to the FP by Kiva and the Kiva lenders assume the risks of delinquency and default on the loan.

    From the Kiva lender perspective, the easiest way to understand this transaction is as a form of refinancing. The client in the loan description is a real person who has been granted a real loan, which is being refinanced by Kiva lenders. So the money supplied by Kiva lenders does indeed go to the Field Partner to replenish money already given to the client. But in the end the money the client has received has been supplied by the Kiva lenders, and the risk of delinquency or default is borne by the Kiva lenders.

    The reason this works (and is sometimes misunderstood) is because of the fungibility of money. That is, any $25 is the same as any other $25. If I borrow $25 from you in the form of a $20 bill and a $5 bill, when I repay using two $10 bills and five $1 bills you will not complain that I have not repaid "the same" $25 (not even the same denominations in this case, let alone the exact same physical bills). $25 has changed hands once in each direction and we are both satisfied because money is fungible.

    Conceptually tracking $25 in cash from Kiva lender to end client is possible, but actually tracking the exact currency is not possible because of the number of intermediate steps. Even if the client magically received the $25 the moment I clicked on the final "Pay" button in PayPal (even ignoring currency conversions!), it still wouldn't be "my" $25. It would be PayPal's $25. PayPal will next bill and be reimbursed by my Credit Card company, which will then bill me and eventually get paid. But at the end of the chain the client has conceptually received the equivalent of US$25 in her local currency from me in my local currency through at least eight intermediaries (my bank, my credit card company, PayPal's bank, PayPal, Kiva's Bank, Kiva, the FP's Bank and the FP). (In practise, the process is even more complicated because of the payment system Kiva uses known as "net billing" - another separate topic).

    The bottom line, ignoring the intermediaries as simple facilitators of the transaction, is that the client I have chosen to support is really and truly the client I am supporting.

    [​IMG]
     
    Last edited: Nov 9, 2013
    milchap and miles and smiles like this.
  4. miles and smiles
    Original Member

    miles and smiles Gold Member

    Messages:
    17,531
    Likes Received:
    61,942
    Status Points:
    20,020
    Great explanation, yultide. Even an "oldie" like me learned something from this post. :)
     
    milchap and YULtide like this.
  5. Explore
    Original Member

    Explore Silver Member

    Messages:
    379
    Likes Received:
    216
    Status Points:
    445
    I'm starting to loan extensively on Kiva, and avoiding field partners with loan defaults and major delinquencies. Some partners with no defaults or delinquencies do however have negative profitability (return on assets). Should I be concerned about losing money on loans in that situation.....or maybe not if it's the possibly deep-pocketed Catholic Relief Services?

    Thanks.....
     
    YULtide likes this.
  6. YULtide

    YULtide Gold Member

    Messages:
    2,745
    Likes Received:
    10,554
    Status Points:
    10,520
    Negative profitability for the Field Partner isn't necessarily a problem assuming the FP is a not-for-profit enterprise. Many field partners are charitable institutions that are able to lend at a loss because they are supported by donors There should be no correlation between losses on the investment portfolio by the FP and risk of loss by the lender in such cases.
     
    Explore, miles and smiles and milchap like this.

Share This Page