Doing Well By Doing Good: Making Microloans Available and Generating Credit Card Spend

Lots of folks have used micro-lending site Kiva as a way to earn miles and generate credit card spend to achieve signup bonuses.

The idea is that Kiva lets you fund an account by credit card, and Paypal waives the processing fees. You may a microloan, and once it is paid back you withdraw the funds. You generate spend and get your money back. Of course there’s some risk of non-payment, but the vast majority of loans repay (and since those loans are generally small, each exposure is small). You do need to be able to float the funds though for several credit card statements.

Now competing micro-lending site Zidisha is temporarily waiving credit card fees as well.

There’s lots of discussion on Milepoint about Zidisha.

I really like doing well (miles) by doing good (making funds available for small projects in developing countries).

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I like how Zidisha breaks down the repayment interest and total repayment amount for each borrower. Kiva apparently charges the borrowers very high interest rates.

  2. Well, now that the cat’s officially out of the bag, you may as well discuss the really big one: Microplace. Paypal (EBAY) owns it. As long as you fund your investment with a credit card linked to your Paypal account, there’s no fee. And it posts as a purchase. And you earn a modest interest rate (less disingenuous than Kiva, in my opinion).

  3. Gary, what is the minimum amount you can lend usually? In other words, what do you consider small exposure?

    Also, I suppose I would have the same question as Kevin – what should be your expectation for payback %?

  4. In answer to 1 and 3 above, the minimum Kiva loan is $25 and the max is generally $500. The default rate is something like 1% or less. I have lent more than $3,000 over the last year and have received every penny back (you can withdraw, but I keep mine in Kiva on an auto-lend cycle). The repayment cycles range from around 6 to 24 months from what I’ve seen, and each loan has a risk rating based on the provider’s history. If you take all of the available info into account, it’s extremely low-risk.

  5. Good stuff. Kiva doesn’t charge interest, they are a funding source for other organizations (that do charge). At first I thought the interest rates are high (20%!), but when you think about inflation and servicing costs in the countries they operate, they aren’t too bad. Ideally we’d loan money at 0% interest to those in need, but someone has to cover the administrative costs.

    Second… As for manufactoring spend.. I’d just encourage people to do this because they believe in the cause. If abused, and paypal stops their generous support, the impact is loss of a vital service to those that really need access to capital in developing countries.

    As for risk. 1% is about right.

  6. I think the term sometimes had to do with the country. I decided to send a Kiva loan to Costa Rica after a wonderful vacation there and all loans were 3 years.

  7. @Cara: That’s true: some countries like India require lenders to wait at least 3 years before getting the money back.

    I have my reservations about microcredit loans, however, both from the frequent-flyer end and from the end of the person receiving the loan. Frequent-fliers should make sure they have exhausted all avenues of legitimate expenses that can be charged to a credit card (just make sure not to spend much more money than you would if you were paying cash) before they attempt “manufactured spending” of any kind. I found out my utility company now accepts credit cards for a flat $4.50 processing fee, so I pay for >1 year’s worth of electricity in advance so I can get my points now.

    As for the microloan applicants, oh the horror stories that have come out of this industry. A classic road to hell paved with good intentions in a large number of cases. Some of Kiva’s partners were found to charge as much as 60% interest on their loans. For more info about how microcredit has backfired (it will sound all too familiar to anyone in the US with an underwater mortgage) check out this article:

    If I were ever in a position where I would have to manufacture spending, I would be very careful to make sure the partner organization of a microcredit firm was on the level. I don’t know enough about MicroPlace’s partners to recommend any one of them, but the only partner I would trust is; they lend money to the artisans they work with at 0% interest.

  8. I do not think you can expect them to lend at 0% interest.

    First, it is not free to do the investigating, tracking and accounting for lots of small loans. Second, a reasonable interest rate helps to ensure that participants have a feasible business plan with a reasonable chance of success. If the money is free, it is not valued as much.

    To the woman who buys a sewing machine with a $100 loan, then starts making clothing for her kids and neighbors and to sell to tourists, the $120 she pays back a year later is not 20% interest – it is a chance at a new quality of life.

    I agree with those who say to use Kiva to do good, not to get the last frequent flyer mile out of a deal.

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