Paying interest to lenders - pros and cons

[Guest]

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[Bus]

I was talking this over with a friend of mine and he had the idea that the "loss" of interest could be tax deductible. Basically the interest the borrower would have had to pay could be deducted from the donor's taxes.  Sounds like a complicated idea, but keeps the spirit of giving to those who need it without another layer of cost (whether to the borrower or the MFI), but potentially attract a larger donor base.

[FANAFI]

I also lender via Prosper.com (believe me, not plugging it) and had losses which were reported. I'm pretty sure any loss here via default would also apply, however, it would be such a small amount that it wouldn't be worth the time to work out on your tax return. I wonder if this would apply though since this is a non-interest investment through a 503c. Any tax gurus out there?

-Jeff

[AGullen]

I'm pretty sure any loss here via default would also apply, however, it would be such a small amount that it wouldn't be worth the time to work out on your tax return. I wonder if this would apply though since this is a non-interest investment through a 503c. Any tax gurus out there?

From Kiva.org's FAQ section:
"25    If my loan defaults, can I then claim it as a tax-deductible donation?

No, because it was intended as a loan, not a donation.  However you can claim it as a capital loss."

[Julia]

I'm a prosper lender too, makes me think there might be a few of us here!

I saw your subtle hint randulo.  I actually don't think there is a rush on this.  I know Kiva has it on the web site that they might charge interest in the future,  I don't think they are actively working on this now. I am guessing that they are working their butts off just to keep up with all the current growth, that they aren't considering changing their business model right now. Or did I miss some announcement?

I think they do read these boards and will consult with people, they are very grass-roots oriented.
 

[pjduncan]

Perhaps Kiva could credit a certain amount of "interest" to an individual's account but keep it seperate, as in still legally owned by Kiva.  This would reward long time members by giving them the satisfaction of seeing their lending power grow, but still not turning it into a profit making venture.  It might also get around any regulatory hurdles Kiva currently faces about paying real interest to lenders.  This scheme could potentially be funded through donations to Kiva, rather than charging higher rates to loan recipients, sort of a donation matching shceme that rewards people for staying active over time.

[AGullen]

Perhaps Kiva could credit a certain amount of "interest" to an individual's account but keep it seperate, as in still legally owned by Kiva.  This would reward long time members by giving them the satisfaction of seeing their lending power grow, but still not turning it into a profit making venture.

To go off of this idea Kiva could employ a credit system similar to what they have now for when loans get repaid. Lets say you've accumulated $25 from the interest charged on your loans. Once you hit this magic number they could allow you to re-loan this amount to new people (or buy gift credits to get friends hooked), but not to 'pull' it out for your own use. That could sort of apease both sides. Your buying power (as stated in loans you can afford to fund) will grow, but people will not financially gain from these loans keeping intact the good-will system thats in place.

[Ari]

Wow!  I'm impressed so many people have contributed to this topic.  My (perhaps naive) idea when I made my original post was that if Kiva offered a 10% interest on the loans, I could put my savings into Kiva instead of into the bank.  I was not thinking about "making money off the entrepreneurs" or "having poor people pay my ROI".   So far I've lent $500 on Kiva, but if there were 10% interest, I wouldn't mind transferring $5,000 from my savings into Kiva, (while accepting that I could potentially lose some of the money).
However, like I said in my original post, my savings account here in Iceland has 12% interest, and I know most American banks' interest rate is much much lower, with the highest available around 5%.  Am I right in thinking that because of that, when Americans want to get a good interest rate, they put their money into the stock market, not the bank?  Most people here don't think about putting money into stocks - the banks having good interest, for one reason.  A 10% interest would encourage me to use Kiva to deposit my savings.  That would help more entrepreneurs and still give me an equivalent return on my money, so I could use Kiva like my bank.  A kind of social investment.  A 3% interest on Kiva wouldn't do anything for me, I wouldn't want that.  Again, I don't want to make money off poor people, I'm just imagining being able to put substantially more money into Kiva than I do now without looking at lost interest.  But don't get me wrong, I'm very happy with Kiva as it is.  10 years from now I'll probably be up to at least $5,000, and if I need the money I can extract it when the lenders repay - so Kiva is acting as a savings account anyway.
I hope I've made myself clear - I'd hate someone to think I want to rip off the world's poorest people.

[pjduncan]

Ari,

Hope I wasn't one you thought might have misinterpreted your original post.  Based upon the percentage of your savings you've put in Kiva and your participation here, one would be hard pressed to find anyone that would have a right to question your motives or generosity.

I also realize that my idea wasn't addressing your issue, as that still in no way makes it possible for someone like you to invest a substantially larger portion of their net worth in Kiva.

My personal view on your original question is that if the interest rate were to be made high enough to be a valid savings vehicle, especially when compared to 12%, it would make the burden too great for the borrowers.  I'm sure it is probably a very complicated question though.  Issues of what a person is borrowing the money for, what their country's rate of inflation is and whether they have fixed or floating currency exchange rate all would play major roles in where the threshold would be before the interest rate would become unworkable.  In certain ways I'm surprised their isn't a much higher default rate simply from currency exchange issues, though I'm sure this must be one reason loans are typically for such short time periods.

[randulo]

Just as a practical matter, adding the level of complexity required to pay interest would add a heavy cost in changing the way the whole accounting would work and making a lot more work for everyone involved not to mention certainly raising the already high cost to the borrower.

I'm sure the idea came from the right place, I don't challenge that at all, but I respectfully submit is isn't a good idea for this final reason I give above.

[Ari]

agreed!