Microfinancing is a widespread practice of lending money to unbanked and underbanked individuals or entities. Usually, it stands for small amounts as low as $100. Microloans often come with short repayment terms and high-interest rates that may turn into predatory lending. However, most microcredit organizations are completely legal.
The phenomenon of the high popularity of these loans is based on several reasons. For instance, it’s just super convenient when you can get some money without long approval processes and strict credit checks. However, microloans are controversial as they may force debt accruing. Further, we’ll try to find out how it all works and why is it popular.
The Brief History of Microfinancing
Despite some of its specific forms, money lending/borrowing is similar to microloans, which were known for quite a long time. The concept itself was defined by Muhammad Yunus. Actually, in the 1980s, he invented the modern microfinancing approach as we know it. And received a Nobel Peace Prize for this achievement in 2006!
Yunus and his Grameen Bank are providing money to people in need. According to the idea, this aid should help them to exit poverty by establishing a business. Sadly, the ambitious project failed miserably. Various studies found that the income of borrowers doesn’t rise substantially. Even families that started their own businesses didn’t become richer.
Nonetheless, skeptics of microcredits shouldn’t be too happy. Despite this type of financial support doesn’t help people to fight poverty, it helps in other ways. If you’re interested in the history and consequences, Vox has a great long-read on this topic. Check it to reveal more interesting nuances about microfinancing becoming.
Main Factors of Microloans Popularity
Well, we found that microfinancing institute isn’t the magic wand that turns poor people into moneybags. But there are dozens of thousands of clients that apply for microloans. Why? Here are four possible reasons.
1. Convenience and Speed
Organizations that provide microcredits are fully focused on customer experience. They have to compete with banks and governments so flaws of major companies are advantages of microloans. For example, there are dozens of land-based kiosks in big cities and small towns so a client can easily find one. Ads are everywhere, too. Microfinancing teams also operate online widely to speed up the approval and money transferring.
2. Innovative Tech
Lack of modern technologies and convenient contact options is another problem of traditional lenders. Hence, people look for microloans because they know that these companies have functional websites and apps, as a rule. To get money, a borrower needs a smartphone and 5 to 10 minutes only. No delays, no queues, no constant checks. The most innovative teams don’t have physical branches at all because they focus on popular mobile-only approach.
3. Low Requirements
The third big factor of microloans’ success is strongly associated with the customers’ problems. The majority of unbanked and underbanked people don’t have a credit history at all or suffer from poor credit score. For this, microfinance corporations list extremely favorable requirements. They don’t need your income proofs and they don’t check your credit. It’s enough to have a valid ID to get money.
4. Poor Economies
Lastly, here’s a more global and complex reason. Most often, microfinancing is popular in regions with not the best economies, e.g. Bangladesh, India, the Philippines, Russia, etc. The cost of living rises day by day while salaries stay put or grow too slowly. People can’t cover their daily expenses. Simultaneously, they can’t get a solid credit because of low income or unpresentable occupation. Microloans are their only choice, in this case.
Microloans VS Other Financial Aid Options
If you’re considering getting money from a microcredit institute, do your due diligence. Explore other options available in your country. Check eligibility, talk to finance experts, and don’t hurry up. It happens that money is needed urgently, nevertheless, think twice before opting for microloans.
Here are a few options available worldwide as alternatives:
- Credit cards or credit lines in reputable banks, sometimes, with 0% interest.
- Crowdfunding campaigns that work fine if you need a large sum.
- Traditional loans provided by banks, governments or private firms.
- Various charity options like utility assistance, grants, and scholarships.
Microloans aren’t perfect. Equally, they aren’t awful. They don’t make people rich immediately and even don’t help new entrepreneurship. However, they also don’t accumulate debts all the time and don’t force people to commit suicide. Both extremely good and extremely bad consequences are possible but they aren’t representative.
Economist Bruce Wydick once told that microcredits in poor regions are similar to traditional credit cards in wealthy countries. They’re well-known, they’re easily accessible but they can’t change your financial status. Sounds good, huh? Probably, that is the main reason for microloans’ popularity. People just want to access easy money.