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Microloans Vs. Traditional Loans: Which One Is for You?

By Nicolas Moore | July 11, 2022

In the lending world, microloans are helping people find success while getting the money they need. 

Microloans are somewhat different from traditional loans because they are unique in how people borrow them. Microloans are lent differently from conventional loans because the money comes directly from investors rather than a bank. Instead of stressing over lenders’ approval from a large financial institution, you can work with investors to get the funding you need for your loans. That changes the borrowing process entirely, opening up more opportunities for people to receive money. 

Traditional loans can range from personal loans to mortgages, funded by banks and financial institutions. These loans are what people automatically think of when borrowing money is necessary. Microloans and traditional loans each have advantages and disadvantages when you need a loan. 

Between the two options, you can find different lending options that will benefit anything you need. 

Defining Traditional Loans

Traditional loans are the typical loans you will receive from a bank for multiple reasons. 

Banks can offer everyone personal, medical, home, and auto loans. These are the typical loans that people use, but banks and financial institutions have the necessary capital to lend that money. Most banks can give out loans from $10,000 to well over $500,000, depending on the loan the borrower needs. A home loan can go as high as 1 million dollars, while personal loans usually top out at $50,000 to $100,000 since they do not need to be so high. Banks are where people go when they need money since they offer higher loan amounts for anything they need. 

While bank loans are great to use because they can accommodate your financing needs, a typical loan from a bank involves a rigorous approval process many borrowers will not pass. Many loans have high credit score requirements that make them challenging to secure and stressful if you need a loan quickly. This fact should not turn you away from a bank loan but should put them at the forefront when deciding which loan you choose. 

Also, traditional loans are mainly for financing large amounts of money and cannot give a small amount. That is because it takes a bank the same amount of work to create a loan of $1,000 as $60,000, which is why they will not lend you a personal loan below their starting amount. That will cause an issue if you do not need a large loan because you will have no choice but to borrow whether you need it or not. If you are in a pinch, it might make the loan harder to pay since you are paying off more than you need. 

Defining Microloans 

Microloans are different from traditional loans because they are funded directly by investors instead of banks. 

Besides being funded differently, microloans offer a very different type of lending because they are much smaller than traditional loans. Since the money comes from investors, the amounts lent out can go lower because you can work with the borrower directly to get a deal suited to your needs. That makes microloans more special because you can fix the amounts to what you need, within a loan amount range of $100 to $2,000, borrowing much less than a personal loan from a bank. 

The upside to taking out a microloan is that since the money is investor-backed, the credit requirements are not as stringent. If your score is low and you cannot get approved for a bank loan, you can work with investors and show them that you are a better borrower than your credit score shows. A direct relationship with someone lending you money offers many more opportunities than you will ever get with a bank. Many lenders make you apply online anyway, so there is no way to work with someone to get approval based on your circumstances.

Due to that, microloans are here to help you in your time of need. Sometimes, you might need $500 or $1,000 to provide you with new opportunities that could help you get the bigger loan you need. Regardless, microloans give you more flexibility to get fast cash. 

How They Compare 

Microloans and traditional loans each have unique features that may work for you or not. 

The first question you have to ask yourself is how much money you need to borrow on your loan. If you need less than $2,000, then microloans are a perfect choice. However, if you need more than $2,000, you’ll need to look into a traditional bank loan. Many borrowers might not need to borrow under $2,000, and sometimes they just need that extra bit of money to help them get to the next paycheck or fund a new idea with less risk of having a huge loan. 

When you need to buy a home or car, microloans will not be enough, and a traditional loan will be necessary. 

Another thing to consider is the approval process and how quickly you need the money the loan will supply you. As mentioned earlier, microloans are usually easier to get approved for since there are no specific credit requirements per se. When you are in a time of life where your credit score is low while you need money, microlending can help you get the cash you require when traditional loans deny you. 

Even though the loan is small and might not be the entire amount you need, microloans can offer you money fast and easy. Quick lending is difficult to come by, and microloans act faster than any bank loan can, improving your efficiency to pay for whatever you need.

All these unique features that microlending offers are helping borrowers get the necessary funding they need in a much more flexible way. When traditional lending options don’t work for you, microloans from a Peer-to-Peer lending platform like Lendee will get you the money you need.

When to Pick Each Loan

With traditional loans and microloans being so different, there are certain situations where one loan has advantages over the other. 

Sustaining Your Business

When you need to sustain your business, you can benefit from using a microloan over a traditional loan. 

When small businesses need help sustaining their production or funding their work to the next sale, microloans offer the flexibility to help. Even though the loans are small, they can help small businesses pay for a new shipment of products that will bridge the gap to more money-making opportunities. Once more products sell and money is flowing again, the business can quickly pay off its small loan and move on with its business. Microloans offer more flexibility that can help small companies benefit from borrowing money. 

Home Improvement 

When you need a home improvement loan, the better loan option for you would be a personal loan or a specific home improvement loan from a bank. 

Home improvement projects are often large and will cost more than the maximum amount a microloan can offer. You could borrow multiple microloans for any home improvement project, but it is much simpler to borrow one substantive loan for the necessary money. Numerous lenders offer loans directly meant for home improvement projects and can help you get more favorable terms for the project. Traditional loans are great for aiding you in any home improvement project that you have in mind. 

Student Supplies

When students need loans to help pay for books and other supplies, microloans can be a great option. 

Multiple lenders offer student loans, but they usually carry considerable interest rates and only loan large amounts of money for things like tuition. When a student requires books and supplies like a laptop or tablet, microloans are the better option for financing those expenses. Instead of struggling to pay for things, microloans help make the necessary materials easily accessible for every student. 

Borrow Your Microloan Today

We hope now you know the difference between microloans and traditional loans and can decide which is better than the other based on your requirements and financial situation. If you are interested in borrowing a microloan, you can get it quickly with Lendee! 

It is a trusted peer-to-peer microlending platform that works with both investors and borrowers to fund the loans people need. Lendee uses innovative technology to help borrowers and investors make the best decision. Lendee makes microlending more flexible for borrowers to get quick cash at competitive rates while allowing investors to build a diversified portfolio.