I use Kiva on a regular basis to earn miles and points for my travel. Kiva is a microlending organization allowing users to lend as little as $25 to entrepreneurs in mainly third world countries. The borrower or borrowing group then pays back the loan in a series of installments over a number of months on a previously specified repayment schedule. There is no interest paid by the borrower, but it is an opportunity to earn miles and points through your credit card spending while also helping small businesses. By that reasoning, we can think of our credit card points as essentially the “interest we’re being paid.”
I have loaned out a lot to Kiva over the past two years and I am currently in the top 1% of Kiva lenders in terms of amount loaned this year. I credit all my loans to the Kiva milepoint team, run by frequent miler guru Randy Peterson. Together, we have lent over $7 million dollar on Kiva.
As a team, we are very happy to help. However, these loans are for months at a time and involve floating funds. There is also some risk of default and I tend to minimize that risk by working with field partners that have a good history of repayment. Over the course of my loans, I have only had a .09% default percentage. That is, for every $100 I loaned, I only lost 9 cents and that was all on a single default.
In this post, I aim to give a light introduction to Kiva lending. It is one of my main tools in the toolbox for earning miles and points. I tend to use it to meet minimum spending requirements on my credit cards. When not doing that, I use my U.S. Bank FlexPerks card, which earns 3 points per dollar for all charity spending.
How Lending on Kiva Works: The Steps
For a brief introduction to the Kiva process, let’s go through the steps for how a loan works.
- Choose loans: Kiva presents us with a number of loans stemming from different countries, field partners and repayment schedules. We choose a loan or a few loans and add them to our loan basket. For each loan, we can loan anywhere from $25 to over $500.
- Pay for your loans through Paypal: Once you’ve chosen your loans, the only way is to pay through Paypal. You can use any credit card for this. As its own act of charity, Paypal waives all credit card fees on loans to Kiva so it doesn’t cost anything to loan.
- Wait for your loan to be repaid: All loans are repaid on a pre-specified schedule. They may take 6 months, 8 months, even 15 months. As an example, you may make a loan over 8 months and get back 1/8 back every month. For the most part, most loans will be repaid.
- Withdraw to your Paypal account: Once you start receiving loan repayments, you can withdraw any repayments to your Paypal account, from which you can then send to your bank.
Choosing Good Loans and Managing Risk
Kiva does involve floating funds for months at a time. It’s not a quick turnaround at all and you should only get involved with Kiva if you can part with your funds for at least the length of the loan. That said, not all loans are created equal. All loans go through a field partner and I only try to work with field partners that have a good record. It is possible to lose money on Kiva so I want to stress again and again that you need to be very careful whom you lend to!
When lending through Kiva, there are two things we want to minimize:
- Length of repayment.
- Amount of risk of monetary loss.
The length of repayment is fairly self explanatory. The sooner the funds get repaid, the sooner I can get them back and use them toward other investments (or lending again on Kiva). Since I get the same points with a shorter or longer loan, I try not to go for loans that are too long and prefer to keep my loan length at 8 months or less. Different loans post all the time so I do have a few opportunities to loan for 8 months.
There are essentially three types of monetary loss risk with Kiva:
- Loan default: A default is when the party you loan to defaults on a loan payment. Although this is extremely rare for me, it has happened. This can be minimized by choosing field partners with a good repayment history.
- Loan delinquency: A delinquency is when the party you loan to misses a payment. It usually just means that your repayment is delayed, not lost. Even though I try to choose loans to minimize this risk, I do get a few delinquent loans every once in a while. I don’t stress over it and most will return to good status.
- Currency exchange loss: When you loan in a foreign currency and the currency drops in value, you may sometimes suffer a small loss even if your loan is repaid. To completely avoid this, I will only work with either partners that cover currency exchange loss or countries that use US Dollars as well (such as Ecuador).
Choosing the Right Field Partners is Everything
When you make a loan on Kiva, you choose a specific loan and a specific person to lend to. However, in reality, you aren’t giving the loan to the entrepreneur himself. The entrepreneur is given the loan through a field partner, who assesses his credit rating and determines the terms of the loan.
What is a field partner? A field partner is like a local bank administering the loan. That said, your risk exposure is not to the entrepreneur himself, but actually to the field partner and the field partner really does act like a bank. The field partner has a portfolio of loans and does charge interest on the loan. If the field partner is running a profitable portfolio, the field partner often finds himself in a position where he can cover losses even when the loan defaults.. after all, we have incentive to continue working with them, in that case.
That’s why I always assess the risk of the field partner before lending. I tend to choose profitable field partners with a low level of delinquency. Field partners that have repaid their loans in the past are more likely to repay, although this is never a guarantee. As I show on the right, you can set filters for loans. I always set filters so that only the following field partners are shown:
- Rated partners with a rating of at least 4 stars.
- Loans do not have currency risk.
Even when those filters are set, you can always check the individual stats on any field partner in the loan itself. As an example, I can see below that field partners FODEMI does full due diligence on its loans and, in the almost three years on Kiva, has had 0% delinquency and default. Provided I can find a loan that’s within the length limits I set, I am happy to work with FODEMI.
The bottom line is our money is valuable! It’s important to do our research and minimize risk before we loan!
When to use Kiva
There are a few reasons when Kiva can be a lucrative strategy:
When you have a minimum spending requirement to meet on a credit card and would prefer to put your idle funds toward that spending requirement.
To earn miles and points on credit cards. A few good cards I’d use:
- The U.S. Bank FlexPerks Visa card is, in my opinion the best one to use. The card offers 3 points per dollar for all charity spending and Kiva is a charity. 20,000 points will pay for any ticket up to $400 (and 30,000 points up to $600 and so on) so each point can be worth up to 2 cents. That’s up to 6% cash back on every dollar lent.
- The Barclaycard Arrival World MasterCard is, of course, one of my favorites. Every dollar spent earns 2.2% cash back to use toward any travel expense that you put on your card.
- The Starwood Preferred Guest card has points that can be used toward hotels. The point also convert to many different airline partners receiving 1.25 miles for every Starwood point.