Putting a face to a loan: Online microlending surges in popularity

With two months 'til her wedding, Emily Erlandson, 23, an accountant from St. Louis Park, was drowning in bills.

She needed a loan, but banks quoted interest rates that exceeded her credit card rates, and the lowest rate LendingTree.com dug up for her was 18 percent.

That's when Erlandson turned to Prosper.com, a peer-to-peer microlending site she learned about in a finance blog. She knew her clean credit history would elicit lenders. So did her profile's attention-grabbing headline, "Getting married!! Limited parental financial assistance." And the big, blond curls in the engagement picture she posted certainly didn't hurt.

"The picture gave it a more personal touch, which you can't do with a bank application," she said. "People feel for you."

Indeed. In three days, 288 people bid on Erlandson's $7,000 three-year loan, driving the interest rate she had started at 14 percent down to 9.55 percent. Now she's married and on track with her monthly payments and her Happily Ever After.

Old made new
The lending of microloans, or small loans, is an old practice, made famous by Nobel Peace Prize winner Muhammad Yunus, whose 31-year-old bank has issued more than $5 billion in loans to several million borrowers.

But peer-to-peer websites, which post borrowers' intimate profiles and compelling pictures, have invigorated the ancient art, infusing a see-for-yourself Pay-It-Forward gratification and the addictive draw of social networking.

In 27 months, Kiva has garnered 164,087 lenders, providing more than $1 million to entrepreneurs in developing countries every month using loans that average $100. Sites that provide loans to people across the globe, including Americans, can post even bigger numbers. For example, in 23 months Prosper has attracted more than 520,000 members (it doesn't break this down by lenders and borrowers), funding about $6 million every month on loans that average $120.

The holidays recharge altruism, said Fiona Ramsey, Kiva spokeswoman. More than $500,000 in Kiva gift certificates, for example, have been purchased since Nov. 1.

Reading borrowers' stories and tracking their progress makes lendng much more meaningful, said Paul Casper, 51, an IT manager from Maple Grove who has made 25 loans on Prosper over the past 18 months. "I've often thought, 'Wouldn't it be nice to be a bank, so you can lend people money directly and see how you're helping them.' This gives you a hands-on touch of what your money's doing."

Casper's loans have ranged from $100 to $1,000, averaging around $300, and the interest rate has ranged from 13 percent to 20 percent.

"The nice thing," he said, "is you get to pick."

Casper looks for borrowers with a clear sense of purpose and direction — like a man wanting to a buy a truck for his landscaping business — not just a heap of excuses and promises. He reads recommendations closely and appreciates the list of expenses some borrowers flesh out.

The endemic appeals to sentiment, like this picture of a young girl dressed as a Disney princess, don't win over Casper. "They could've downloaded it from the Web some place," he said.

The force of a face
Meanwhile, Eleanor Potter, a 36-year-old Spanish teacher from Duluth, seeks out fellow single moms on Kiva. "When I say I work hard to earn my income, it doesn't compare to the way many people in our world truly work to earn money," Potter e-mailed.

Her initial $75 loan has doubled its value and helped six different women entrepreneurs around the world. One woman from Togo uses the loan to purchase and resell secondhand clothing. Another woman from Peru is working on an agricultural venture. "All of these women work hard to support their families, while still seeing the value in educating their children," wrote Potter, who reads their online journals.

There's something about seeing a picture that enables you to make a connection, Potter noted. When she gave her 8-year-old nephew a $25 Kiva loan for his First Communion, he chose a man who "has a good face." The borrower runs a general store in Azerbaijan.

"People get really interested in learning about the countries where they're giving," said Kiva's Ramsey. "'Where is that? Let me Google map that!'"

There's also a thrill for borrowers, Ramsey said. "The customers love it because they know, for the first time in their lives, they're going to have an identity on the Internet. They know that lenders will see their face."

'Perception of need'
But when they see those faces, online lenders don't give indiscriminately. Tracking which borrowers elicit the most bids on these sites hints at the private judgments we make about who deserves help and who doesn't.

"African women in agricultural businesses always get funded more quickly than, say, a man in Eastern Europe who needs $1,500 for a taxi business," Ramsey said. "It has to do with the perception of need, which is influenced by the media. You might call it the Angelina Jolie effect."

There's also the perception of accuracy, which tends to be assumed but cannot be promised. Kiva takes considerable efforts to ensure accuracy, routinely employing fellows, staff members and auditors to investigate, Ramsey said. Occasionally they'll discover the picture does not match the borrower. This is often the result of a lack of education among loan officers, who couldn't locate the exact person and decided to photograph the neighbor lady or spouse instead, Ramsey said. Those "misunderstandings" are part of the learning curve that comes with a new venture, she said.

But there also have been a few cases of fraud: Three of Kiva's 82 partners have been caught conducting some kind of fraudulent behavior, such as skimming. When this occurs, Ramsey said, Kiva ends the partnership, publishes an online notice, alerts the lender and works to repay the loan.

That's a risk that comes with online lending, financial experts say. Still, the default rate is low, with an industry average of 3 percent.

Most of the online borrowers seem sincere, Casper said. His findings on Prosper challenge deadbeat stereotypes, reflecting a muscular entrepreneurial spirit. "It shows Americans still want to make their own way," he said.

And better-off Americans still want to profit off their ascent, Casper added. "It is that American dream on both sides."