Microfinance loans: What they are, things to know
What's the story
Microfinance loans have become a lifeline for many in India, especially those who don't have access to traditional banking. These loans are usually small amounts, meant to help people start businesses or improve their living conditions. Knowing how these loans work can help borrowers make informed decisions and use the money wisely. Here are five important things about microfinance loans in India.
Interest rates
Understanding interest rates
Interest rates on microfinance loans in India can differ widely, depending on the lender and the borrower's profile. Generally, they range between 10% and 30% per annum. It is important for borrowers to comprehend the complete cost of borrowing, including any hidden fees or charges, before signing the dotted line. This knowledge helps in evaluating the affordability and sustainability of the loan.
Repayment terms
Loan repayment terms
Repayment terms for microfinance loans usually vary from six months to two years. The terms depend on the amount borrowed and the lender's policies. Borrowers should ensure that they can meet these repayment schedules without straining their finances. Timely repayments are crucial as they affect credit scores and future borrowing opportunities.
Documentation
Documentation requirements
To avail of a microfinance loan in India, applicants must submit certain documents, including proof of identity, address, and income. These documents are required to verify the applicant's eligibility and assess their repayment capacity. The process may vary by lender, but having these documents ready can expedite the application process. It also ensures transparency and trust between the borrower and lender.
Credit score
Impact on credit score
Microfinance loans also affect your credit score in India. Timely repayments can boost your score, making you eligible for bigger loans at lower interest rates in the future. However, defaulting or delaying payments can hurt your score, making it harder to get credit later on. Therefore, it's important to manage these loans well to keep your financial health intact.
Lender choice
Choosing the right lender
Choosing the right lender is key when it comes to microfinance loans in India. Borrowers should compare different lenders based on interest rates, repayment terms, and customer service before making a decision. It's also wise to read reviews or get recommendations from others who have taken similar loans to find a trustworthy lender who meets your needs.