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Traditional microlending operations are expensive. For example, the average microfinance organization needs to charge borrowers 35% interest for capital borrow

by jkurnia 12y ago

Traditional microlending operations are expensive. For example, the average microfinance organization needs to charge borrowers 35% interest for capital borrowed at zero interest from Kiva.org, to cover its overhead costs. (Source: https://en.wikipedia.org/wiki/Kiva_(organization)#Current_interest_rate_statistics https://en.wikipedia.org/wiki/Kiva_(organization)#Current_in...) Zidisha's overhead costs average about 10% of the value of the loans we facilitate. The costs are fully covered by borrower fees and optional lender tips. Borrower fees include a lifetime membership fee of $12 paid when the first loan is disbursed, and a flat fee of 5% of each loan funded per year the loan is held.

trhway 12y ago
>and a flat fee of 5% of each loan funded per year the loan is held interesting definition of flat fee. It sounds to me like additional 5% interest, isn't it?
- JumpCrisscross 12y ago
  > It sounds to me like additional 5% interest, isn't it? Interest accrues as a function of time. Yes, one could model this fee as an interest rate by taking into account the loan's expected term. But the 5% is not compensation for the time value of money or risk of lending–it is a facilitation payment. As such, calling it a fee seems acceptable. Since the 5% doesn't change with the amount lent, or other factors, "flat" seems an appropriate adjective (though it is more commonly used to refer to a fixed dollar, versus percentage, amount). EDIT: since the "fee" does appear to vary with a loan's term, yes, I think this would be correctly characterizable as interest.
  - trhway 12y ago
    >Interest accrues as a function of time. "per year the loan is held" sounds exactly this. >Since the 5% doesn't change with the amount lent that is the definition of a '%' sign, isn't it? :) Using '%' with "per year" is a definition of interest, isn't? Edit: wow, i just now recognized another possibility - charging 5% x [expected years] upfront - that would be "fee", yes. One fr!cking large fee. Who in sane mind is going to pay it? That sounds like preying on people who have no other choice.
    - jkurnia 12y ago
      Most loans are held for less than one year, so the fee ends up being less than 5% of the amount raised.
    - JumpCrisscross 12y ago
      > "per year the loan is held" sounds exactly this. I was not aware of this. You are correct - this looks more like interest than a facilitation fee. > that is the definition of a '%' sign, isn't it? :) Transaction fees are usually assessed as a fraction of the value transacted. A flat fee, within this context, is a non-varying percentage of the transaction value, e.g. 5%. A non-flat fee has moving parts, e.g. 5% for the first $100, 4% for the next, etc. (or 5% if the interest rate is less than 15%, 10% if above, etc.). It is an ambiguous term. I try to avoid it. Instead of calling a fee "flat" to emphasise its simplicity, make it simple.
- jkurnia 12y ago
  This is intended as a service fee, not interest. It is set at a level that, along with registration fees and lender tips, just covers our operating costs. (For example, in the first quarter of 2014 our average operating costs were $8,225 per month. Our average monthly revenues were $8,507.) It might be more precise to structure the service fee as a fixed percentage of the loan amount regardless of the term. We opted to structure it as an annual rate mainly for simplicity: it can be added to lender interest so that loan applicants can see the full cost of the loan in a single rate, without any other unexpected fees.

by jkurnia 12y ago

trhway 12y ago

>and a flat fee of 5% of each loan funded per year the loan is held interesting definition of flat fee. It sounds to me like additional 5% interest, isn't it?

JumpCrisscross 12y ago
> It sounds to me like additional 5% interest, isn't it? Interest accrues as a function of time. Yes, one could model this fee as an interest rate by taking into account the loan's expected term. But the 5% is not compensation for the time value of money or risk of lending–it is a facilitation payment. As such, calling it a fee seems acceptable. Since the 5% doesn't change with the amount lent, or other factors, "flat" seems an appropriate adjective (though it is more commonly used to refer to a fixed dollar, versus percentage, amount). EDIT: since the "fee" does appear to vary with a loan's term, yes, I think this would be correctly characterizable as interest.
- trhway 12y ago
  >Interest accrues as a function of time. "per year the loan is held" sounds exactly this. >Since the 5% doesn't change with the amount lent that is the definition of a '%' sign, isn't it? :) Using '%' with "per year" is a definition of interest, isn't? Edit: wow, i just now recognized another possibility - charging 5% x [expected years] upfront - that would be "fee", yes. One fr!cking large fee. Who in sane mind is going to pay it? That sounds like preying on people who have no other choice.
  - jkurnia 12y ago
    Most loans are held for less than one year, so the fee ends up being less than 5% of the amount raised.
  - JumpCrisscross 12y ago
    > "per year the loan is held" sounds exactly this. I was not aware of this. You are correct - this looks more like interest than a facilitation fee. > that is the definition of a '%' sign, isn't it? :) Transaction fees are usually assessed as a fraction of the value transacted. A flat fee, within this context, is a non-varying percentage of the transaction value, e.g. 5%. A non-flat fee has moving parts, e.g. 5% for the first $100, 4% for the next, etc. (or 5% if the interest rate is less than 15%, 10% if above, etc.). It is an ambiguous term. I try to avoid it. Instead of calling a fee "flat" to emphasise its simplicity, make it simple.
jkurnia 12y ago
This is intended as a service fee, not interest. It is set at a level that, along with registration fees and lender tips, just covers our operating costs. (For example, in the first quarter of 2014 our average operating costs were $8,225 per month. Our average monthly revenues were $8,507.) It might be more precise to structure the service fee as a fixed percentage of the loan amount regardless of the term. We opted to structure it as an annual rate mainly for simplicity: it can be added to lender interest so that loan applicants can see the full cost of the loan in a single rate, without any other unexpected fees.