Consumers who plan to borrow money from a financial institution need to know their options. Banks and credit unions offer a variety of loans to ensure diversity across the finance market. As a consumer, it is in your best interest to know the benefits, cons, similarities, and differences between the loans that match your financial needs. Two finance terms that all loan seekers should be aware of include microcredit and microfinance.Each of these terms is ssociated with the finance industry. As far as diversity, microfinance consists of a variety of financial services, including checking and savings accounts, payment processing, microinsurance, and microcredit. If you look carefully, you see microcredit is a type of microfinance service that targets consumers in poor communities. The goal of microfinance programs is to help extremely poor consumers become financially independent. Learn more about these two finance terms by reading the content provided in the article below.

Microfinance Targets Poor Entrepreneurs And Small Businesses

While some people may question the need for microfinance companies, they are a necessity for many poverty-stricken communities. Microfinance provides “microloans” to qualifying small businesses, individuals, and entrepreneurs. Microfinance is broken down into two categories, including group-based and relationship-based banding models. Group-based banking models consist of multiple entrepreneurs or individuals who combine their effort to obtain loans and approval for other financial services. Relationship-based banking models are specifically designed for a small business or entrepreneur.

Initially, microfinance banking was limited to loans. Fortunately, this is no longer the case, as it now includes a variety of financial activities, including loans, fund transfers, insurance, payment processing, and savings and checking accounts.

Microcredit Targets Poor Entrepreneurs

Microcredit business targets impoverished consumers in need of borrowing small amounts of money. A major benefit of microcredit loans “microloans” is they are available to borrowers who otherwise would not be eligible. Oftentimes, lenders tend to mark poor and unemployed borrowers from their list. These individuals are oftentimes illiterate and unemployed, creating major issues when applying for loans. Microloans typically range between $100 and $50,000. However, most financial institutions have strict limitations when dealing with impoverished borrowers.

Microloan Statistics

Evidence shows there were about 74 million individual microloans, estimated to be valued at $38 billion in 2009. A Bangladesh microfinance organization known as the “Grameen Bank” reported the repayment success rate for their microloans was between 94 and 98 percent. Financial experts hope this high repayment success rate encourages more financial institutions to become microloan lenders.

As the need for small loans in impoverished communities continues to grow, microfinance is growing in popularity at an alarming rate.

Summary

The primary goal of microfinance is to alleviate poverty in some of the hardest-hit communities. Poor consumers have financial needs that are considered severe in nature than other economical classes. Microloans generally offer a low interestrate that is based on various factors. This type of financial service has grown the number of new small businesses. If the success rate continues at this rate, more financial institutions may be inclined to get involved in microfinancing.