How the Interest Rate of Your Investment is Determined

Written by Lynn Hamerlinck on 27 April 2025

When you invest via Lendahand, you help create equal opportunities around the world while earning an attractive financial return. But how exactly is that return calculated?

In this article, we explain how the interest rate on your investment is determined, how costs are distributed, and why a fair rate is important for sustainable growth. Growth that makes a difference for both you as an investor and for the entrepreneurs you support.

Is Setting the Interest Rate Just a Simple Calculation?

Determining the interest rate on your investment at Lendahand is a bit more complex than a simple calculation, but it’s certainly not a mysterious formula. For each project, we provide clear documents and information to make the numbers as transparent as possible.

Borrowers pay a certain interest rate to investors based on their risk profile and they also pay a fee to Lendahand. Let’s take a closer look at the different elements that determine this pricing.

The Borrower’s Profile

Every investment starts with a company requesting capital through Lendahand. The profile of this borrower is the foundation for determining the interest rate you ultimately receive as an investor.

The borrower’s profile gives us insights on the:

Type of investment: Is it a direct loan to a business, or a loan to a financial institution or microfinance institution?
Risk level: Assessed and presented using a credit score.
Country of operation: The country or region provides a benchmark for local interest rates and insight into the political-economic environment in which the borrower operates.
Currency: This affects both the loan's interest rate and your return. In many emerging markets, the U.S. dollar (USD) is the dominant or official currency. Borrowing in USD helps entrepreneurs avoid exchange rate risk, conversion fees, and costs for currency insurance.

Reading tip: Want to know what the full project process looks like before it appears on Lendahand? Read more here.

“The type of investment largely determines the risk, and the risk largely determines the interest the borrower pays.”

1) Direct Investments in a Single Business

If it’s a company like Spark seeking a direct loan, risk becomes a major factor in determining the interest rate. Direct investments in businesses carry more risk as there’s no intermediary or buffer to absorb potential missed payments, unlike with financial institutions.

To reduce this risk, Lendahand works with partners that offer investment guarantees whenever possible. Read more about our partnerships with Carabus and Atradius DSB.

2) Investing in a Financial Institution

If the borrower is a financial institution like Validus or a microfinance institution (MFI) like Kaebauk in Timor-Leste, the dynamics change. These borrowers shoulder much of the risk themselves. They spread the risk across the thousands of loans they provide to their clients, the small and medium-sized enterprises (SMEs).

Note: Although there’s often a correlation between risk and return—the higher the risk, the higher the interest—that rule of thumb doesn’t always apply. Factors like guarantees or strategic decisions can influence the interest rate. That’s why the credit score is a more reliable indicator of a project’s actual risk.

How Much Interest Do Entrepreneurs Pay to Local Financial Institutions?

If you receive an 8% return on your investment, how much interest does the entrepreneur pay on their microloan? It’s a valid question with an answer that depends on various factors.

The first consideration is the country where the financial institution operates. Political and economic stability heavily influence interest rates. In countries with high inflation or unstable currencies, risks—and therefore rates—are higher.

For many small entrepreneurs, traditional banks are not an option. Their only alternative may be loan sharks charging up to 300% interest annually, offering no guidance or protection whatsoever.

Microfinance institutions (MFIs) offer a much fairer alternative. Their interest rates generally fall between 30–50% per year in local currency, while providing personal guidance within a legal framework.

Why These Rates Can Be Justified

At first glance, annual rates of up to 50% may seem high, especially compared to European standards. But in the context of emerging markets, they reflect a different reality.

The cost of microfinance is driven by:

Personalized support and admin: MFIs serve thousands of entrepreneurs, often with small loans that require individual attention and building long-term relationships.
Remote locations: Many clients live in rural areas, requiring staff to travel extensively to reach and serve them.
Additional services: Many MFIs offer financial literacy training, entrepreneurship courses, and organize community events, especially for women entrepreneurs.
Higher risks: Despite their social mission, MFIs need to stay financially healthy. They face higher default risks and must maintain financial buffers.
Local currency interest rates: In most emerging economies, the inflation rate and the official interest rates in local currency are much higher than the base rates in euro or US Dollar. For example, the Kenyan government borrows 2 year money at more than 11% and the Mexican government at more than 9%. Companies, let alone individual entrepreneurs or consumers, always pay higher borrowing costs than their governments.
Operational costs: Salaries, tech infrastructure, office space, and legal compliance all factor into their interest rates.

Why MFIs Need Capital Themselves

The basic model of an MFI, like any financial institution, is to borrow and lend money and make a margin between these two activities from which the operational costs are paid and a (small) profit is made. As such, any financial institution is constantly borrowing new money enabling them to make new loans to entrepreneurs.

A financially healthy MFI ensures:

Ongoing support for (new) entrepreneurs.
Fair wages for local employees.
Access to training and personal support for clients.
Lower risk for impact investors like you.

When Do We Consider a Higher Interest Rate Justified?

In our interest rate and impact analysis, we carefully assess whether a proposed rate is fair and justified. We take into account factors such as:

Market comparison: How do the total costs (including any additional fees like insurance or mandatory deposits) compare to other financing options available to the borrower?
Profitability of the financial institution: If a financial institution is highly profitable, we expect this to result in lower costs for the entrepreneurs they finance.
Use of profits: We assess how much of the institution’s profit is reinvested versus distributed as dividends to shareholders.
Executive salaries: We monitor executive compensation closely. If excessively high salaries are reducing profits, we believe there is room to lower the rates charged to entrepreneurs.

Through this approach, we ensure that the projects you invest in contribute to fair growth and real impact.

Why does Lendahand Charge a Fee to Borrowers?

Lendahand is a social enterprise and certified B Corp. That means we put people and the planet first. All our income comes from fees paid by borrowers—not from you as an investor.

In general, we charge borrowers a one-time fee before disbursement and an ongoing fee during their loan term. The combination of both result in an average fee of 3-3.5% per annum for Lendahand. This compares to 6.7% interest per annum offered to the crowd on average in 2024. In other words, approximately 1/3rd of the costs paid by FIs goes to Lendahand and 2/3rds to the investors.

This margin allows us to screen projects, assess risks, and offer a transparent and sustainable platform for impact investing. Our goal is for Lendahand to remain a trusted platform for meaningful investments.

A Real-World Example: Espoir in Ecuador

Ecuador is one of the few countries where microfinance interest rates are publicly regulated, making it an ideal example to show you how the interest rate on your investment is built up.

Let’s take a look at the projects of microfinance institution Espoir on Lendahand:

Your investment earns 8% interest per year, with quarterly repayments.
Espoir pays Lendahand a one-time upfront fee of 1.6% on the total loan amount. Besides that, there is an ongoing running fee of 2.5% during their loan.
The entrepreneurs Espoir finances pay 10–40% interest per year, typically on short-term microloans (3 to 12 months). These entrepreneurs often operate in the informal sector and need quick working capital, for example, to buy stock.

The short duration and frequent refinancing increase the annual interest rate, but also help the MFI to cover risks and operating costs, allowing Espoir to continue offering tailored microfinance.

Breaking Down Your Return

Here’s a summary of the factors that influence your investment interest rate:

Factor	Impact on Interest Rate
Borrower’s interest rate	How much the borrower can pay while balancing impact, risk, and return
Risk profile	Higher risk usually means a higher rate
Country or region	Economic stability, inflation, and regulation influence risk and rates
Currency	USD projects may offer higher returns to offset conversion and FX risks
Lendahand’s fee	We take a small margin to provide a safe and quality platform

Why Interest Is Compatible with Impact

One final concern some impact investors may have is: Is it fair to earn interest on an impact investment? At Lendahand, our answer is a wholehearted yes.

Financial returns and positive impact don’t have to be at odds. In fact, interest makes your impact sustainable:

You protect your capital from inflation.
You grow your investment portfolio.
You can reinvest in more projects, amplifying your impact.

Curious why investor Dirkjan chooses Lendahand? Read his story here.

Invest Today with a Return That Creates Equal Opportunities

There’s no one-size-fits-all formula for setting interest rates. That’s why you’ll see a range of rates across projects on Lendahand. What they all share is a fair balance of risk, cost, and impact.

By earning a healthy return, you make your impact sustainable. At Lendahand, our mission is to create equal opportunities—for you as an investor and for entrepreneurs across the globe.

Looking for an investment that makes a difference? Browse current projects on our project page.