So we got some “.org”anizations. These Micro Finance Organizations give loans to people in far off lands to go to school, or to buy equipment to do work – shovels and what not. I have several issues with the way some of these organizations function, lets look at three basic problems: Transfer of Risk, High Rates, and Lack of Disclosure.
The Break-Down:
This is what happens, you go to Vittana, and you think great. This guy needs help. He of course does. You take him or her under your wing, throw down a modest portion of the loan. They say most pay back the loan, and i imagine they would, they are appreciative. Life changing stuff.
But while you go home and sleep on your pillow, the loan on this person is running. The juice is running, the balance is growing. Your not going to collect, but somewhere someone is going to collect for you. How, by what means, who can say?
Transfer of Risk: Take Ownership!
The Nobel prize to Laurette Muhammad Yunus got the nobel for starting a bank that made small loans, the bank he started took the risk.
Here is a problem with these charities.
They are charities that make a profit off of your loan.
Yes of course, i know that they are doing a good thing in theory.
And Yes, I do think profit is a necessity for sustainability.
But i wonder, “why dont they just take the risk.”
Of course it is more sensible to pass that to you.
Why not raise capital and lend their own money?
Who doesn’t want to Borrow other peoples money at a interest free, and without the requirement of repayment guarantee, then lend that money at a high rate?
High Rates = High Costs: Be Reasonable!
Another reason i get upset is the disequilibrium in the model. Furthered in the lack of sustainability.
In some cases Vittana.org is charging as much as 22%. Outrageous. This means a person that is borrowing while in school ends up owing two times the loan amount after three years in school. Now if they take another four or so years, depending on the amortization it could be double that, or four times the amount of the original loan by the time it is paid back.
When repaid to you, original amount – cost of inflation. This is not a sustainable model. Over time, people are able to lend a lower amount then their original contribution.
Lack of Disclosure: Be forthright!
The kicker – lack of disclosure. The rate of loan is not disclosed to the lender, yes you mr. charitable. The usury laws in most United States- State, omit north Dakota and of course our haven – Delaware, require interest rates to not be as unreasonable as the rates Vittana is offering these poor student.
When risk is extreme, interest rates are extreme. When the risk is being taken by someone who envisions a charity work, risk is low – interest should be low.
Also, Rates of interest could be fixed dollar amounts based on time period rather than interest rate. Its confusing to the consumer.
