What is a Personal Micro Loan?
A personal microloan is a small loan (usually under $5000) granted to an individual. These loans are relatively quick to acquire, and there are typically no restrictions on how this money can be used. Since these loans are generally short-term and high interest, they are best used only in emergency situations, such as paying an expected medical expense. They are also used by those without access to traditional commercial credit to develop some personal credit history. These loans are relatively common in Europe and Canada but do not have much a role in American financing. The rules regulating personal microloans vary from nation to nation. Be cautious if you apply for a personal microloan because there are many predatory lenders out there.
Since personal microloans are designed for individuals with poor or no credit history, they are considered high risk for the lenders which raises the rates. Also factoring in the rate is the size of the loan. Since the administrative cost for a lender is roughly the same whether the loan is large or small, a lender needs to charge a higher percentage rate to make a profit on a smaller loan. Due to these two factors rates for personal microloans can be extreme. Medium-term personal microloans often have APRs of as much as 29% annually. Other short-term lenders present their interest rates as a weekly figure. Using a weekly rate can be deceptive, as an interest rate of 2.5% may seem low, but as a weekly rate, with compound interest, your debt could double in less than a year. Since the rates are so high, you should only take this sort of loan as a last resort.
While they vary from lender to lender, credit requirements for personal microloans, tend to be much lower than most traditional means of personal financing. Since the loans are so small, the lender can minimize the risk of the borrower defaulting. Some microlenders claim to place more value on the general character of the borrower. Others ask only that the borrower is employed. Many microlenders do not ask for a credit check. Many of the microlenders which do ask for a credit check use your credit check to determine your rate, not to decide whether you qualify or not. These lower standards allow more people to qualify for loans and make for quicker processing time, but they do come at the cost of much higher rates.
For Bad Credit
The primary reason to get a personal microloan is that the borrower’s credit rating is too poor for other forms of personal financing. Personal microloans can be used to help improve your credit. However, with interest rates this high it can become difficult for you to make your payments, and if you are late for making a payment, it will further damage your credit rating. If you qualify for a credit card, it is easier and less costly to use your credit card for day to day purchases and pay your credit card bills before they charge any interest. Many credit cards add rewards as extra incentives as well. If you do not qualify, it is possible to get a family member with better credit to cosign. Be aware though that if you fail to make minimum payments, you will negatively affect your cosigner’s credit as well as your own. It is possible to end up with a bad credit score because of a simple clerical error. You can ask for your credit history from any of the major credit checking firms. If you can find a mistake (and prove it), then it is possible to get your credit history updated.
Secured vs Unsecured
A secured microloan is a loan in which the borrower provides collateral to guarantee the repayment of the loan. Collateral is something of value which the lender can take if the borrower fails to make payments on the loan. Common forms of collateral include real-estate, vehicles or equipment. An unsecured microloan is, unsurprisingly, a loan in which the lender does not have any collateral. Secured microloans usually have lower interest rates because the lender can recoup some of their losses if the borrower defaults. The degree to which the collateral lowers the interest rate of the loan depends on the value of the collateral. The closer the value of the collateral is to the total cost of the loan, the more it can lower the interest rates on the loan (although this only applies to a degree). Few personal microloans require collateral, although some lenders let you provide collateral to help lower your rates. If you're looking to apply for a personal micro loan and aren't sure where to start, we would like to offer you the chance to talk one-on-one with a trained Online Loans financial advisor to help you find the best loan for you.