Have you come across the term microloan? This financial solution has become frequently used by individuals in need of small monetary amounts.
As the name implies, microloans provide borrowers with sums no higher than 20,000 kroner. Due to the low borrowed amounts, banks require applicants to pay these loans back within twelve months.
The short timeframe provided for repayment increases the monthly installments, as fees are disbursed over a restricted number of months. Borrowers must be attentive before signing a contract for a microloan to avoid unpleasant surprises.
The following article explains whether microloans are worth the trouble.
What is a Microloan?
Individuals are often confused by the variety of terms used by banks in the context of personal loans, including small loans with no collateral and microloans. In general, all these terms refer to loans where the bank requires no mortgage, and the money can be spent by borrowers in any way they want. Every term is used to describe a loan of a specific amount.
For instance, many banks use the term small credit if the sum is lower than NOK 75,000. Conversely, a microloan would refer to an even lower amount. Some of the most common definitions of microloans describe them as amounts up to NOK 20,000. The minimum amount available for individuals to borrow is 1,000 kroner. The repayment plan for these loans is no longer than twelve months. See this page to check whether microloans are the answer in this cash-strapped age.
There are three to four Norwegian niche banks that offer microloans, whereas the others place the focus on higher sums of several hundred thousand kroner. Borrowers should be cautious when shopping for such loans to avoid the most common pitfalls. In the worst-case scenario, you will end up with a microloan with an effective interest of several hundred percent. This might happen when the amount is too low, and it has to be repaid within a month or two.
How to Find Multiple Offers?
Like in the case of other loans, borrowers can apply for microloans directly to the lenders or use the services of an experienced agent to apply on their behalf. These professionals work with up to twenty different banks and pass on the applications of borrowers to them. The advantages of teaming up with such an agent are indeed attractive.
For example, borrowers pay nothing for the service and receive offers from all partner banks that have the right size of the loan as quickly as possible. Due to the high number of offers, the chances of coming across the cheapest one substantially increase. The choice of a lending agent isn’t supposed to be less important than the selection of the right bank.
Even though most agents are reliable and worthy of clients’ trust, there are certain differences between these professionals that borrowers should take into account. There is no logic in applying for a microloan through an agent who collaborates with banks that lend high amounts. A suitable agent is expected to represent many banks and to have good routines for obtaining the offers.
The portfolios of loan agents should include lenders with both low and high loan amounts. They should have caseworkers as well to provide clients with assistance by answering their questions.
How Much Do They Cost?
Banks specializing in microloans set interest rates in a different manner than larger banks. The same rates generally apply to whoever assumes the role of a borrower. Nevertheless, interest rates have a tendency to become more expensive when the debt is low. The lower the debt, the higher the interest. Additionally, their forward fees are much costlier than those offered by large banks. This URL, https://www.bbc.com/news/business-57764601, explains what interest rates are and why they matter.
Moreover, the total cost of microloans is not only high due to the high interest but also because of the high fees. Let’s assume that you take out a loan of 10,000 kroner from a small bank and should repay it in twelve months. The rate of nominal interest would be approximately 60%, whereas the effective interest would be about 100%. The total costs are 4,000 kroner.
When taking such loans from a larger bank, the interest is likely to be lower as these lenders calculate the rates individually by considering the financial situation and credit score of each applicant. By taking out a microloan of the same amount of NOK 10,000 to be repaid within 12 months, the nominal interest will probably be fifteen percent, while the effective interest will be fifty percent. Consequently, the total costs won’t be higher than 2,500 kroner.
Although these examples won’t apply in the exact same way in your case, they undoubtedly portray the difference between getting a microloan from a small and a larger bank. In most situations, people are capable of servicing a single loan without dealing with any financial problems. The borrowers who struggle the most are those with multiple loans and credits, particularly occurring among individuals over fifty.
Unless borrowers understand how nominal and effective rates differ, they can be misled by the former in terms of how high the real costs are. Individuals should understand that the high cost of the installments originates from the fewer monthly payments. As a result, the fees are spread over a shorter period, which increases the effective interest. Microloans can be surprisingly expensive if you happen to take out several of them. Make sure you get familiar with the total costs before signing any document.
Common Payment Problems
People eager to get a microloan should be aware of the most common payment problems related to these loans. The maximum sum of lån utbetalt or loan disbursed is up to NOK 20,000. As mentioned already, a single loan doesn’t usually cause difficulties like repeated borrowing of microloans and credit debt. This has been proven by most of the credit information agencies in Norway.
Individuals with debt problems are usually those with many loans and credit card debt. In certain cases, such borrowing is used by people using new loans to repay the old ones. Such borrowing occurs in desperation, as borrowers just try to push the problems ahead instead of resolving them. In the long term, this kind of borrowing is not only unwise but also incredibly costly. When refinancing microloans, the new bank takes care of the repayment of the old loans.
If you have already taken out a few microloans, along with credit card debt, you are strongly advised against taking out a new one. In such scenarios, the best idea would be to collect your debt and have just one credit instead of several. The perks of debt collection are worth analyzing. When accumulating debt, borrowers get a significantly lower interest.
Furthermore, borrowers cut some of the term fees that amount to plenty of money when the repayment schedule is long. In the meantime, the risk of default, payment remarks, and increased costs is lower as well. Borrowers start gaining better control of their finances and experience less stress. Dealing with a single creditor is much easier than dealing with many. Collecting debt is not only saving your money but also takes off a bit of your emotional burden.
Only borrowers can figure out the exact amount of money they can save. This sum can be calculated by summing the costs of all your existing credits and loans while comparing them to the expenses of the refinancing loan. The effects of microloan refinancing become greater in line with debt accumulation.
The interest on the new loan used for debt repayment gets lower as the borrowed amount increases. On average, the effective interest on NOK 50,000 is from 13 to 20 percent. Conversely, effective rates on loans over 300,000 kroner range from five to ten percent.
Is Co-Borrowing Common?
While co-borrowing is common, this isn’t the case with microloans. The co-borrower scheme refers to the act of borrowing money with another person and sharing the responsibility. The likelihood of getting your application granted is higher as both candidates have their finances assessed. It’s common for most lenders to require the co-borrower to be either a spouse or a cohabitant. Nevertheless, borrowers should know that the co-borrower scheme isn’t offered when applying for microloans.
Microloans are convenient, available, and trendy.
These loans provide the quickest way to small cash amounts!