Loan interest rate is the cost of using borrowed funds, usually calculated as a percentage per day. To calculate it, you need to divide the daily overpayment by the loan amount.
How the Interest Rate Is Formed
Microfinance differs from bank lending in higher interest rates. The main factors affecting the interest rate on microloans:
- microloan category (for small businesses or individuals);
- the amount and term of the loan;
- the degree of confidence in the borrower;
- features of a microfinance organization — commercial/non-commercial, due to which assets are formed, is the activity carried out legally.
For the needs of small businesses, microloans are issued at a lower interest rate than individuals. Non-profit credit institutions operate within the framework of state support for small businesses and receive funds from the budget at 0%, so they can afford to issue loans at 10-14% per annum.
Green Zone (less than 0.5%)
Regular borrowers in good standing can count on a reduced interest rate of less than 0.5% per day. The microfinance organization is interested in regular customers and develops loyalty programs, offering discounts and bonuses.
Some lending institutions offer preferential rates for students and retirees on, particularly favorable terms. A reduced rate is offered for larger loan amounts. It is more convenient for a microfinance organization to issue one loan for $200 than 4 loans for $50.
Yellow Zone (up to 0.75%)
A slightly higher rate is offered to new borrowers with a good credit history or for amounts under $300. In this case, the credit institution has confirmation of financial discipline, but there is no information on how the client will return the microloan.
The existing risk of delay in payment or non-repayment of the loan is taken into account in the increased interest rate. The rate is 0.7-0.8% per day. In case of successful repayment of the loan, the rate is reduced to standard conditions, usually in the green zone.
Red Zone (1%)
In this zone, loans are issued on unfavorable terms for borrowers. When issuing loans at 1% per day, lenders usually do not pay close attention to the assessment of the borrower. All possible losses are included in the interest rate on the loan and commission. It is not recommended to use the services of such organizations. There is a significant risk of falling into a credit hole.
To avoid any surprises, read the contract carefully. It is better not to apply to credit organizations that issue loans at interest rates that are in the red zone. Even a small delay can result in large losses.