If you’ve been looking at various ways to obtain finance, but you can’t seem to find a good source for small loans, micro loans might be the right type of finance for you. Micro loans provide borrowers with small amounts of capital so that they can try and get the amount of money they need for various uses. But this form of borrowing is not widely known by consumers in the United States – it is considered a niche lending product.

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Introduction

Micro Loans

This guide has been compiled to provide our readers with a comprehensive understanding of what micro loans are. If you’ve heard of this financial product, but you find yourself confused by it, this article is perfect for you. In addition, if you’ve never heard of micro loans, but you’re in the market for a small amount of financing, this article will also be perfect for you.

Make sure to read all the information in this guide prior to making any financial commitments. It’s important that you’re fully aware of the prospective financial products that you’re considering.

What is a Micro Loan?

A micro loan is a form of personal loan. It is simply a small personal loan that is borrowed by a person to cover a cost. Micro loans are a very basic product. Below we will outline some features that are included in micro loans:

  • Term Loan – A micro loan is a term loan, which means it is paid back over a certain predetermined period of time. You will not have flexibility in terms of payments. You will be required to make monthly payments of the same value until the loan is paid in full.
  • Fixed Interest – Micro loans are typically very short term, for this reason they are often fixed interest.
  • Small – Micro loans are very small, the exact amount you can borrow will be explored more further on in this article.

It’s important that you don’t get personal micro loans confused with business micro loans. The U.S. Government has a business initiative to help small businesses obtain small loans. A lot of the information that you find on the internet will be about micro loans for businesses – always ensure that any advice you are receiving is geared towards consumer based personal loans.

Micro Loans Are Typically Unsecured

Because micro loans are so small, they also tend to be unsecured. This is because lenders try and take as much administrative cost out of the loan as possible. It’s easier for them to just charge you a higher interest rate and take on board the risk that you may not pay back the loan. This is a great benefit to the borrower, as there is much less risk involved for you. You won’t have to worry about your valuable assets being seized if you default on the loan.

This being said, not paying back your loan will still impact your credit score. You need to make sure to pay back the micro loan on time and in full. You should never put your financial future in doubt by destroying your credit rating. A micro loan is typically a very small amount of money, it’s not worth creating problems for yourself in the future.

What Are Micro Loans Typically Used For?

So, you may be wondering what micro loans are typically used for. There is no set way that you have to use your micro loan, but there do tend to be some common trends in the way that this form of finance is used. We’ve compiled a list of some of the common ways our readers use micro loans to improve their lives.

Home Repairs

If you have damage to your home, or a leak in your plumbing, you’ll probably want to get things fixed as quickly as possible. It can be hard to pay for this up front with your own money, so a micro loan can help you meet costs and ensure that things are fixed in a timely manner. You don’t want to leave something unfixed if it’s impacting your family’s wellbeing.

Auto Repairs

One of the most inconvenient things possible is when your card breaks down. But many people can’t survive without their cars. If you need to get to work or take your kids to school, you’ll need to make sure that you have a way of doing so. Using a micro loan to finance urgent auto repairs is the perfect way to get your car back on the road.

Phone or Computer Purchase

If your phone or computer stops working, you might find that you’re unable to do your job. It’s important that you do as much as possible to make sure that you have the tools you need to operate correctly. If you use these items for work, using a micro loan to help finance them may be a good option to speed up the process.

Overdue Bills

If you don’t pay your bills, you’ll end up with a damaged credit report. The last thing you want to do is end up with a debt collector hassling you for money. You can use a micro loan to pay back your bills and then pay it back over a fixed period of time. This is a much better option than defaulting on your bills – it won’t have nearly as much of an impact on your financial future.

Miscellaneous Expenses

Life is expensive, sometimes you might find that you’re in a bit of a pickle when it comes to paying for certain things. If you need a bit more breathing room, a micro loan may be able to give you the space to make better financial decisions.

Who Provides Micro Loans?

As mentioned previously, micro loans are a much more niche lending product than many other forms of loan. For this reason, they’re harder to come by. You have to find the right lenders if you want to get this form of finance. Many traditional banks and lenders don’t waste their time with micro loans. They’re not interested in issuing such small loans – especially ones that are unsecured. Below are two different avenues you can take if you want to find a micro loan for you or your family.

Online Lenders

Online lenders are typically your best spot to find micro loans. There are plenty of online personal loan lenders that have started making a name for themselves in the industry. There are now hundreds of these lenders around the country. This means that you have a great variety of online lenders to choose from – you’ll find there are lenders that give money to people of all financial backgrounds.

These lenders also tend to have a very straightforward application process. You can often apply in under ten minutes. You’ll typically get an answer straight away, which is good for someone in a hurry. In addition, if you work with the right lender, you’ll also probably find that they can get the money into your account within 24 hours of approval.

Peer-to-Peer Lenders

This is another form of lender that is great for those who want to get micro loans. Peer-to-peer lending is a unique form of lending that is typically conducted over an online platform. Investors will provide money that is lent out at a specific interest rate. You will then pay back the investor the money that you owe him, plus the interest rate. It is the same as a term loan except that you’re borrowing from lenders that are not traditional banks or loan providers.

This is a great way to get quick access to a micro loan. The only downside is that interest rates tend to be quite high, so you won’t want to use this avenue if you’re worried about saving money.

The main benefit of using peer-to-peer lenders is that there is sometimes no credit score requirement. Meaning you’ll be able to get access to this form of loan even if you have a bad credit score. It also means that you won’t damage your credit score by applying for this form of finance.

How Much Can I Borrow?

The entire purpose of obtaining a micro loan is the idea that you are not borrowing a large amount of money. For this reason, micro loans come in very small sizes. The amount that you are able to borrow will depend on the lender that you’re working with, but there does tend to be some common trends in the industry.

Most micro loans range between $100 and $3,000. If you decide to borrow more than this, it will probably not be considered a micro loan. Instead, it will be considered a regular personal loan. Make sure that you only need to borrow an amount of money that will fit into a micro loan bracket.

Advantages of Micro Loans

This guide has provided you with all the information you need to determine if micro loans are right for you. But taking in so much information at once can cloud your judgement. That’s why it’s often better to look at things from a bird’s-eye-view. We’ve compiled a list of the top benefits associated with micro loans – check it out below:

  • Structure – You pay back the loan over a set term time, which means there is structure in the loan to help ensure that you don’t get stuck in debt. This makes it a much better lending product for someone who is trying to make sure they don’t enter a debt trap.
  • Lower Interest – Many micro loans will have lower interest than credit cards or payday loans, which means they help people save money for the future.
  • No Conditions – You don’t have to use the micro loan for a specific purpose, which means that you can make sure you have money for whatever need you may have.

Disadvantages of Micro Loans

There are also plenty of disadvantages when it comes to micro loans. You need to make sure you’re aware of these issues prior to applying for this form of finance. You don’t want to end up not being aware of some of the downsides until it’s too late.

  • Small Amounts – One obvious downside of micro loans is that they come in small amounts. Although this won’t be an issue for someone who only wants a small amount of money.
  • Less Lenders – There are less lenders that want to provide borrowers with microloans. They don’t see the value in providing unsecured loans for such small amounts. It’s hard for them to make the money they need. For this reason, you’ll have to work with much more niche lenders.
  • Fees – Some micro loan lenders will charge you high fees. This is annoying because of how small the loan amount is. If you have high fees on a micro loan, it can significantly increase the amount of money you’re paying for your loan.

Verdict

After reading this guide, you probably have a pretty solid idea of if micro loans are right for you. It’s important to be sure that you want a micro loan – you’ll need to be borrowing a very small amount for it to be the type of loan that you’re looking for. In addition, you should make sure that you’re comfortable with all the features included in the loan.

If you’re having trouble deciding which lender to work with, head to our home page and check out the lenders that we recommend to our readers. We have a range of different lenders that we believe are the best in the industry. We make sure to do extensive research to determine who the best lenders are.

Remember, choosing the right lender is key in having a good experience. You don’t want to work with a lender that has a bad reputation with past clients. You should value the opinion of people that have worked with lenders in the past – if they haven’t had a good experience with a lender, there is a high chance that you won’t either.

FAQ

Understanding Microloans

You may have heard the term microloan but you are unsure about exactly what the term involves. Whether you are exploring funding solutions for personal or business use, it helps to learn all about the various types of funding available to choose from. Learning more about microloans and how they work can assist you in selecting the best type of funding that is suitable for your situation.

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What is a microloan?

A microloan is a small loan that is provided on a personal basis or to a small business. The loan is very small in size and the rate of the interest can vary based on the lender.

How do micro loans work?

Microloans are issued at a fixed interest rate and the loan is then paid back over time. The loan is structured as a term loan and after the loan has been paid back, the borrower can request a new microloan if needed.

How big are microloans?

Microloans tend to be on the smaller size and typically range from $300 to $1,000. The actual amount will vary based on the lender who is providing the loan. However, some lenders provide microloans to businesses for up to $50,000.

When were micro loans created?

The Grameen Bank was founded in 1976 by Muhammad Yunus. He began making small loans through this bank to the impoverished people of Bangladesh who had entrepreneurial goals but no access to credit.

What is the purpose of microloans?

Microloans help borrowers who have low incomes and low credit and who are unable to qualify for a loan from a traditional lender. Microloans allow these borrowers to have access to small amounts of funding that they otherwise couldn’t access.

What is the best business to start using micro loans?

There are few restrictions being placed on microloans and so the possibilities for how they are used are far-reaching. You can obtain a microloan and start a small craft business successfully.

What are microloans used for?

Microloans can be used for a variety of different purposes including buying equipment, buying furniture and fixtures, working capital for business overhead, as well as for inventory and supplies.

What is considered a microloan?

A microloan is a small business loan that is made to a small business or individual who wouldn’t be able to qualify for a large loan from a traditional funding source such as a bank.

What percentage of micro loans are repaid?

The number of microloans that are repaid can vary from lender to lender. However, in general, industry trends indicate that about 95% of microloans on average are usually repaid.

Which kind of business is not likely to be eligible for a microloan program?

A business without a clearly outlined business plan and without a definitive way to repay the loan will most likely not be able to qualify for a microloan program from a lender.

Why do microloans fail?

The commercialization of microloans over the past 15 years has had a major negative impact and has caused many small businesses to become exploited by high-interest rate microloans.

What are the similarities and differences between micro loans and banking?

A micro loan is issued with the expectation of repayment from the borrower. Similarly, a bank issues financial products which are set up as term loans for repayment over a set period of time.

What is the percentage of people who get microloans?

In the year 2015, an estimated 125 million people around the world, of which 80% were women, were on the receiving end of a microloan. The total amount lent was estimated at around $100 billion.

How effective are small micro loans?

When used for their intended purpose, small microloans can, in fact, be very effective. However, when they aren’t used as intended, it can cause the business owner to get into further debt.

How to invest in microloans?

Microloans can be used as an investment vehicle. Start by joining a peer to peer lending site and choosing the option to invest in loans. A minimum investment can be as small as $25 or up to $5,000 with an estimated interest rate of 7%.

How effective are microloans?

Microloans can help a small business owner get access to capital to expand their business or even to start a brand new business. This makes them effective in helping those who wouldn’t normally have access to capital.

Where are microloans used today?

Microloans are often given to people in third world countries for the purposes of starting a business to better their financial situation. Individual loan recipients can purchase the items they need for their business.

How much can you get in micro loans?

The amount of a microloan can vary greatly and many sources offer as little a $300 to $500 while other small business microloans can go as high as $50,000 such as with the SBA backed microloan.

What is the microloan commitment fee?

A microloan commitment fee is a fee associated with the microloan that is charged to a borrower by the lender. The fee is a way to guarantee that the lender will keep the funds available.

How to categorize micro loan repayments?

To categorize a microloan repayment, you will need to create a liability loan account and record the loan repayment schedule in Excel or a different program such as Quickbooks.

How To Obtain A Microloan

Once you have found out what a microloan is and what they involve, your next step will be to learn whether or not you qualify for a microloan and how to obtain one. A microloan can help you to get the vital funds you need for business expansion as well as for starting a new business venture. Due to their small size and relatively short repayment length, microloans are not usually as hard to qualify for as traditional bank loans.

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How to get a microloan?

To get a microloan, first, find a microloan lender whose requirements match your qualifications. Then, follow their required steps and submit a business plan to increase your application’s credibility.

How to qualify for a microloan?

To qualify for a microloan, start by fixing your credit report. Then you will want to create a strong business plan. Submit your application to a trusted lender and follow their instructions step by step.

How to apply for a micro loan?

If you are applying for a microloan, you will need to find an intermediary lender who you can apply for the loan through. Follow the loan requirements in order to complete your application.

How to get a microloan with bad credit?

Great credit is not a requirement for obtaining a microloan. In order to qualify for a microloan with bad credit, check the loan mandates ahead of time. The average credit score borrowers with microloans have is 575. 

How to get a microloan to start a business?

In order to get a microloan to start a business, you will need to find a reliable lender and apply through them in order to receive the microloan.

How to get a micro loan without having a social security number?

In most cases, you will need a social security number in order to apply for a microloan. However, there are some microlenders who will allow you to get a microloan just by using an ITIN (individual tax identification number).

How can I get a business microloan with terrible credit?

Yes, there are micro business loans that are available to people with less than perfect credit. These loans are usually offered at a minimum credit score of 500.

How to get a microloan with no job?

You can get a microloan without a job by applying with a lender who doesn’t require existing income. Instead, the requirements may include a business plan that shows projected income.

How to get a micro loan with a job but no credit?

You can get a microloan with a job but with no credit by seeking out lenders that do not require a specific credit profile in order to qualify for the loan.

Types of Microloans 

There are many different types of microloans that you may be able to qualify for in order to help you to start or expand an existing business. Some of the micro loans you can apply for can be obtained through private lenders while others are available through a government agency. Some of the government microloan programs include the USDA FSA microloan program, the SBA microloan program, and others.

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How long does it take for an FHA microloan to go through?

From the start of the loan process, until the loan is closed, the entire process can take anywhere between 30 to 60 days for the loan to completely go through.

How to get a startup microloan?

To get a startup microloan, at first you will need to determine exactly how much funding you will need. Then apply for this specific amount with your local lender.

How large is a USDA micro loan?

A USDA microloan can provide funding for farmers who need access to capital. The loan amounts can go as high as $300,000. This is the maximum loan amount for a Joint Financing or Participation Farm Ownership loan.

How long to get a loan from USDA microloan?

The length of time it takes to get a USDA loan from the moment the loan is applied for until the funds are deposited into the bank account will vary based on the loan application but it can take between four and six months.

How many different microloan programs are there for women around the world?

There are thousands of microloan programs available through different lenders. From traditional banking institutions to non-profit lenders, there are many options for microloan borrowing for women around the world.

Why are most micro loans given to women?

Microloans are given to women especially in disadvantaged countries in order to help the local economy grow and to provide financial advantages in poor areas. However, there are microloans available to everyone.

How to apply for a government microloan?

In order to apply for a government microloan, you can begin by visiting the microloan section of https://www.govloans.gov. The exact link to find out more information about these government microloans is https://www.govloans.gov/loans/loan-details/1501.

How do I get the microloan for women?

There are many different microloans available for women in business. You can get microloans for women by applying directly with a lender such as Kiva, Grameen America, Accion, or the SBA Office of Women’s Business Ownership.

What is the SBA micro loan?

In the SBA microloan program, the SBA loans money to intermediate non-profit lenders who then distribute the funds to eligible applicants. The funds go towards funding their various business needs.

Where to apply for an SBA loan microloan?

SBA doesn’t provide access to funding directly. Instead, they make the funds available through an intermediary lender. To find a local lender that offers a microloan from the SBA, you will need to check this link.         

How much is an SBA microloan?

The largest amount that you can borrow through the SBA microloan program is $50,000. However, the average amount of an SBA microloan is typically about $13,000.

What is needed for a micro loan SBA?

To qualify for a microloan with the SBA, the borrower will need to have good credit history or an explanation of negative marks, a minimum of two years of industry experience, and capital in the business among other requirements.         

How long does a micro SBA loan take?

The entire process for obtaining a microloan from the SBA can take anywhere from 60 to 90 days. However, typically the loan process takes between four to six months from start to finish.             

How to qualify for a microloan from the SBA?

Great credit is not a requirement for a microloan from the SBA. however, the applicant will need to have an explanation for negative marks on their credit report as well as the ability to repay the loan.

How to get a car microloan with a job but no credit?

A microloan can be used for the purchase of a vehicle as long as the vehicle will be used for business purposes and if all other requirements for the loan are met.         

How long do you have to pay back a Kiva micro loan?

The loan repayment process begins one month after the funds have been deposited into your bank account. Kiva loan repayments are only accepted through the Paypal platform and repayments are sent to Kiva at [email protected]

How much are USDA microloans worth?

Operating microloans provided through the USDA can be obtained up to the amount of $50,000. The repayment terms vary but do not typically go over seven years long.

How easy is it to get an FSA micro loan?

FSA stands for Farm Service Agency and is a loan program offered through the USDA. The loan is geared towards small, beginning farmer, niche and non-traditional farm operations.                 

Christine has a solid background in personal finance as she spent the last eight years working at one of the biggest banks in the US. She managed her own team of financial advisors that helped hundreds of people with their financing needs. Her innate understanding of different financial products and loans helped her move up the ranks quickly after graduating with a degree in Business Administration.