Mission, Not Profit, Drives Interest Rates in the U.S.: Response to “Banks Making Big Profits from Tiny Loans”
Readers of “Banks Making Big Profits From Tiny Loans” (The New York Times, April 14, 2010) should note that the lending practices described are not consistent with the practice of microfinance in the United States, where the strategy is also alive and well.
The U.S. ACCION Network has distributed over $260 million in loans to micro-businesses across the US. We have done so with interest rates that reflect our primary mission: to put reasonably priced credit in the hands of those who are locked out of the traditional financial mainstream, and to do so in a manner that assists the business owner in increasing, not depleting his/her assets. Though it would be easy to say thresholds are set by law, the primary driver is creating an environment in which hardworking people have an opportunity to succeed.
Typical U.S. microloan interest rates are set so that the loan recipients profit, not the lender.
Our rates range by program and by state but are well below the rates cited as endemic in the microfinance world, below credit card interest rates, and are accurately stated on the Kiva website. On loans that average $10,000, there isn’t much income generated for ACCION once we have covered our capital costs and the risk we take per loan. As a result, while we continue to drive improvements, we are not sustainable without the support of foundations, individual donors and government. That is a fact that has limited how much of the market we can serve and our ability to go to scale.
Following a rigorous due diligence process, ACCION USA was chosen by Kiva to be one of two microfinance partner organizations working with US-based businesses. The relationship serves each of our missions well: to facilitate access to the capital required to start or grow a business. Kiva’s ability to harness the good will and interest of millions of people in investing to directly affect the lives of individual business owners enables ACCION USA to lend more to more businesses. That’s not the material of criticism; it is a positive outcome born of innovation, common mission and a dedication to doing what is right for the people we serve.
CARD Act Gives Consumers a Break
I want you to think back to the very first time you opened your mail to find that golden ticket: a pre-approved credit card offer. Was it been everything you hoped it would be? Or did you fall for some of the oldest tricks in the book…
Were you the college freshman who now realizes that the free pizza, Frisbee, and bottle opener at the credit card company’s fall expo booth might have actually cost you more than you thought (cough, 70” flat screen TV with 24% APR, cough)? Did you find out the hard way that “due on March 17th” actually meant “due by 9:00am on March 17th, so it actually needs to be here on March 16th… which conveniently falls on a Sunday, so let’s have it here by close of business on Friday the 14th”? Or maybe it just took a little too long to realize that consistent $30 monthly payments on your $800 couch would make your payment plan longer than your sofa’s life.
Every year, a new crop of credit card users finds themselves in these types of predicaments. Fortunately, the new Credit Card Responsibility and Disclosure (CARD) Act now makes each of these situations much less likely to occur.
The legislation is complex, but the highlights include limits on interest rate hikes, broader definitions of “on time” payments, new rules for pre-existing balances, and requirements on disclosures and extending credit to young adults. No more pre-5:00pm deadlines. No more interest rate hikes without 45 days of notice. No more credit card reps hiding in wooden horses allowed within 1,000 feet of college campuses.
The CARD Act’s transparency requirements may be particularly beneficial to small business owners in offering them an opportunity to strengthen their personal credit histories, further allowing them the opportunity to finance new employees, purchase inventory, or open a storefront. As an organization, ACCION USA’s goal is not only to provide small business owners with a transparent financing alternative to credit cards but also to teach them the necessity of managing credit card debt. The underlying message is simple: spending and paying responsibly keeps money in your business. And money in small businesses means economic recovery for our country.
Let’s hope that the CARD Act’s transparency requirements will mean the same thing.
Tags: accion usa, CARD Act, credit card, Financial Education, interest rates, legislation, microfinance, money management, new law, small business