Micro Loan: Meaning and How To Apply?

What is a Micro Loan?

A micro loan is a small amount of money offered to small businesses as well as individuals. It can help you manage emergency monetary needs without any collateral. They are used for purposes like buying goods or paying for daily expenses. You can also use these loans to cover sudden costs. The process is speedy & does not need hefty paperwork. Repayment stays affordable with fair rates of interest. Most lenders ask for proof of steady income or a stable business record. So, it makes approval easier without difficult terms or long checks.

Objectives of Availing a Micro Loan

You need to understand why people choose this type of credit before applying for a micro loan.

So what are the characteristics of micro loans?

Here are the key things:

1. The main purposes include supporting the growth of small businesses and giving women entrepreneurs the funds they need to start or expand their work

2. A micro loan also helps in handling gaps in cash flow & provides relief during sudden financial troubles

3. Many business owners use it to stay motivated and keep their operations running smoothly

4. It can also support buying new machinery or upgrading equipment for small and medium enterprises

5. These loans aim to bring financial inclusion and give opportunities to those who may not have easy access to money

6. They also create a positive social impact by offering funds to people and communities with limited financial resources.

Pros and Cons of Micro Loans

It is important to check both benefits and risks before choosing micro loans.

Here are the main points to consider before you opt for the loan:

Pros of Micro Loans –

You can explore the key advantages of micro loans below:

1. Access to Capital

Small businesses and individuals who cannot approach traditional banks often find support through these loans. Take one of the micro loans examples: these funds can be used to improve operations, start income projects or cover urgent personal expenses.

2. Flexible Repayment Options

Micro loans come with terms that align with your financial scenarios. Repayments can be planned according to earnings. This helps you handle both business and personal cash needs without stress.

3. Does Not Need Any Collateral

You do not need to risk personal or business assets, as these loans do not require security. This makes access to funds safe for those who may not have property or valuables to pledge.

Cons of Micro Loans –

Here are the disadvantages of micro loans:

1. The Risk Associated with Over-Indebtedness

Relying too much on small loans for daily expenses or business operations can result in excess debt. They may end up sustaining their enterprises or paying daily. Taking multiple loans without proper planning may create repayment issues and financial pressure.

2. Loan Amount is Limited

The amount offered under micro loans is usually small and may not cover large-scale business needs. Many borrowers often need to look for additional funds to achieve bigger growth plans.

3. A High Interest Rate

The rate of interest depends on aspects such as income & credit score (as well as financial history). This can make the loan more expensive when you compare it to any other funding option.

Also Read: Micro Credit

How to Apply for a Micro Loan?

Now that you know the pros and cons, it is time to understand the steps to apply. Applying for a micro loan is a speedy process and you can complete it online.

The following are the steps to consider:

Step 1: First, collect your documents required for applying for the loan.

Step 2: Click on the 'Apply Now' button on the lender's website. You need to find it online.

Step 3: If the portal asks for a sign up, give your phone number. Alternatively, you can log in using your details. Press Submit to proceed. 

Step 4: Fill in the application form with your details & financial information.

Step 5: Upload the necessary documents & press 'Submit'.

Your application will be reviewed & verified by loan experts after you submit it. Then, you will receive the micro personal loan amount once the lender approves your loan. 

Documents Required for Micro Loans

There are a few documents that you must keep ready before applying for a micro loan.

These are the following –

1. ID Proof: Aadhaar Card, Voter ID, Passport, PAN Card or Driving License are needed for identity verification.

2. Business Proof: A Business Registration Certificate is required to confirm the legal status of your business.

3. Address Proof: Utility Bills or a Rent Agreement are asked for to confirm the business address.

4. Income: Bank statements of the past 6 months are required to check your income and repayment ability.

Eligibility Criteria for Micro Loans

You need to meet a few basic requirements to qualify for a micro loan.

These include:

1. Age: You should be at least 24 years old at the time of applying.

2. Business Age: Your business must have been active and registered for at least two years.

3. Yearly Turnover (Minimum): Your business should generate a yearly turnover of not less than Rs. 6 lakh.

Micro Loans in India

There are three main types of micro loans in India that are commonly used. These include the following:

1. Emergency Loan: This type of loan helps people during sudden needs such as hospital bills or urgent family expenses.

2. Small & Medium Enterprise Loan: SME loans are useful for raising working capital. A business can use it for purchasing machinery or paying off long term loans or high-interest debts. It helps companies expand their operations.

3. Income Generation Program Loan: These personal micro loans are mainly offered to create income opportunities. You can use it for building significant assets. 

Conclusion

From creating financial opportunities to supporting business growth, micro loans do it all. At the same time, these loans also offer financial strength to individuals as well as communities. You can select the right amount of instant cash loan to manage your money better. Or you can also plan to grow your business or handle sudden expenses confidently. The right planning & wise use of funds make all the difference.

Overall, these loans play a role in building financial stability while supporting your progress. So, now that you know about these loans, apply for a personal loan & take the next step in your financial journey.

Frequently Asked Questions (FAQs)

Q.1. How are microfinance loans typically repaid?

Repayment of micro loans is done in fixed installments, usually every week or month. The schedule depends on the borrower's income flow & the lender's policy. Many borrowers repay from earnings generated through business or a regular salary. Online repayment choices make it easy to pay on time and avoid late charges.

Q.2. Are microfinance loans beneficial or harmful?

Micro loans are helpful for people and small businesses with limited access to banks. They offer fast funds for emergencies while managing daily needs as well as business growth. But they may cause debt pressure if used without planning. 

Q.3. What is another name for a micro loan?

A micro loan is often called personal micro loans or microcredit. Both names refer to small funding offered without collateral. These loans help individuals meet financial needs that are too small for traditional bank loans. 

Q.4. What are the typical interest rates and repayment terms for micro loans?

The interest rate on micro loans in India usually ranges between 12 per cent & 36 per cent yearly, depending on income and credit profile. Repayment terms may be flexible, lasting from a few months to two years. You can select repayment schedules suited to their cash flow. They keep instalments manageable & stress-free.

Q.5. How do micro loans differ from traditional small business loans?

Micro loans are smaller in value. More importantly, they need fewer documents & usually do not require collateral. They are processed faster & suit people or businesses with limited access to banks. Conventional small business loans, on the other hand, involve larger amounts as well as strict requirements. They can delay approval & disbursal.

Q.6. Can micro loans help build credit for individuals or small businesses?

Repaying micro loans online on time helps build or improve their credit score. Regular payments show financial discipline. This increases the chance of getting larger loans later. Constant repayment also proves trustworthiness for small businesses. It makes it easier to access other funding, such as short term loans.

By: Jaivinder Bhandari

Jaivinder Bhandari is a Senior SEO Manager at lendingplate with a passion for writing on a wide range of financial topics, including personal loans, credit and debit cards, investments, money management, and practical financial tips to help people improve their financial well-being. Linkedin Profile