Working-class people receive financial services through microfinance. Currently, 160 million people around the world receive microfinance loans. A person with a low income may find it very difficult to get a loan from a bank. In microlending, a microfinance institution (MFI) makes a loan to a microentrepreneur.
One component of microfinance is microlending. Some MFIs also offer micro-savings and microinsurance programs, and financial training programs. Sounds good? Then it might be the type of financing you are looking for. Here are some things you should know about micro loans.
Microfinance versus microcredit: what’s the difference?
Many people associate microfinance with microloans or microcredit when they think of microfinance. Many people’s first exposure to microfinance is through small loans to purchase raw materials for their businesses or to fund their education. Still, it can also encompass a range of services.
The use of savings accounts and insurance products enables entrepreneurs or individuals to park their funds safely and earn a bit of interest at the same time. A positive financial situation can also be achieved by using deposits, fund transfers, and payment services.
In order to avoid taking out micro business loans, you must avoid doing so unless it is absolutely necessary and you have no other reliable means of getting the money you need. Before applying for a personal loan, you should check the following information.
Type of interest offered.
If the loan is offered with a Reducing interest rate, look for a Flat rate loan. A portion of the EMI goes toward principal repayment every month with a reduced interest rate. Every month, the outstanding principal decreases, resulting in decreasing interest payments and a greater portion of your monthly payment going towards repayment of principal.
A fixed interest rate is applied to the entire loan amount throughout the loan’s tenure. Monthly EMIs gradually reduce the principal amount. The calculator does not take this into account. There is a noticeable difference between the nominal flat rate and the Effective Interest Rate quoted initially.
Again, the bank is trying to drain your wallet of money. The bank agents usually communicate higher processing fees and then lower them later to appear more helpful.
Check your CIBIL score.
Despite the bank setting your CIBIL score before approving the loan, you should always check it yourself. You can earn a better interest rate with a strong CIBIL score. Having a BAD CIBIL score can result in an application getting rejected or increasing the interest rate, but few know that having a good CIBIL score can help you bargain for a lower rate.
You should always apply through a reputable bank or financial lender’s website.
Phone Banking is one way to reach your bank/lender of choice rather than going to agents who say they have pre-approved loans and can get you a loan immediately. Loans are never instant. Before getting a loan, you will have to complete certain paperwork. Without any paperwork, you cannot get a loan, which is something that most people forget.
Checking the minimum locking period is another very important aspect. If you need a large loan for a short period (3–6 months), and you have a lump sum available, it’d be nice if you could pay it off when you have the money available.
A minimum locking period of 12 months may require certain banks and microfinancing companies. This means that regardless of what happens, you must pay the EMI during the locking period, which would have resulted in high-interest levels.
Ensure that you will not be charged a pre-closure fee or a minimum pre-closure fee before getting a loan. Some banks offer 0% pre-closure charges on loans. An approval decision depends on the criteria specified by the bank/financial institution and is subject to the sole discretion of the sanctioning loan officer.