Today we reduced the maximum interest Zidisha borrowers may offer to lenders to no more than 5% flat, or approximately 10% APR.
This means that borrowers will now pay a maximum of 10% flat / 20% APR inclusive of a 5% flat service fee paid to Zidisha. (This does not include a $12 lifetime membership fee, which is paid once when a borrower first joins Zidisha.)
Previously, we permitted borrowers to offer interest of up to 25% flat (approximately 50% APR). (In practice, the higher rates were mostly offered for small short-term loans, resulting in total interest costs of only a few dollars.) The intent was that allowing borrowers, especially newcomers who had not yet established a credit history or members who had low historical on-time repayment rates, to offer more interest to lenders would help loans that would otherwise go unfunded to attract financing. The higher interest rates were also intended to allow lenders to recoup expected losses at a time when our loss rate was higher than it is today.
In practice, the higher interest rates do not seem to have resulted in higher levels of loan funding overall. We believe the reason is that, while allowing higher interest improved the financial attraction of lending with Zidisha, it simultaneously weakened its humanitarian appeal. The feedback we have been hearing from many of our lenders, supporters and the general public is that allowing such high interest rates undermined Zidisha’s unique value proposition: microlending at lower cost to borrowers than traditional microfinance organizations are able to offer sustainably.
In addition, credit risk at Zidisha has improved and become more predictable: the on-time repayment rate of first loan installments has roughly doubled over the past year. As a result, we do not expect that interest rates of up to 25% flat / 50% APR are necessary to protect lenders from credit risk.
Finally, allowing high interest rates encouraged borrowers to differentiate themselves on the basis of financial returns alone. We expect that reducing the maximum interest rate will strengthen the incentive for borrowers to instead differentiate themselves through memorable personal stories, good photos, frequent and meaningful dialogue with lenders and high on-time repayment rates. This should improve the quality of the lending experience at Zidisha overall.
Our core mission is humanitarian, not profit-seeking. There is no longer a strong reason to allow high interest rates to be offered at Zidisha, and the best way to stay true to that mission is to ensure that Zidisha remains a platform for philanthropy rather than financial profit.
Zidisha is the first direct P2P lending platform to bridge the international wealth divide. To learn more, visit us at www.zidisha.org.