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.
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.
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.
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.
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 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.
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.
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.