No-Interest Loans

You read that right, loans with zero interest! An interesting new financial development has been the introduction of crowdfunded, no-interest loans. Kiva, the microlending pioneer, has launched a pilot program that offers direct, no-interest loans in the U.S. called Kiva Zip (that’s zip for zipcode).

Zip differs from the Kiva’s more familiar online lending program, which lets anyone lend as little as $25 to entrepreneurs around the globe. When someone makes a loan to an overseas entrepreneur, there is an intermediary involved that vets the borrower and takes a fee from the borrower for its services.

In contrast, Kiva Zip operates in the U.S. (and Kenya), and lenders lend money directly to entrepreneurs, so there are no intermediaries or fees. And loans range in the thousands, versus hundreds, of dollars. Entrepreneurs create a profile on the Kiva Zip site, including how much they are looking to borrow and what it will help fund, and people can choose to fund them. Borrowers pay back principal, but there are no interest payments.

Because there is no interest earned, the loans are not considered securities, so federal and state securities laws do not apply. 

How does Kiva protect against defaults? Through a concept called social underwriting, which substitutes personal relationships and character for credit history. To be eligible for Kiva Zip, borrowers must be recommended by a trustee—a prominent person or organization in a city that publicly vouches for borrowers. Alternatively, borrowers can build social capital requirement by bringing on 15 or more people from their own networks who are willing to lend to them as evidence of their “trust network.”

It’s no coincidence that Kiva has found that borrowers whose social networks participate in the loans have a higher repayment rate.

Other startups, such as Community Sourced Capital, a social purpose corporation based in Seattle, are following suit. CSC allows people to lend in increments of $50, called “squares,” to local companies, who can borrow between $5,000 and $50,000. As with KivaZip, there is no interest paid, although there is a $250 upfront fee and a $50 a month fee for the life of the loan.