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Learn All About the Principles of Microfinancing

By Nicolas Moore | August 2, 2022

With more people preferring quick online transactions, microfinancing is changing how people borrow or invest money around the world.

Those who need small loans and those looking for new investments now have more opportunities with microlending. Sometimes, borrowers just need $1,000 to get what they need and pay it back quickly, while other loans are large and take too long to pay off. Instead of being forced to take big loans from banks, borrowers can get small loans quickly. 

And microloan investing gives investors opportunities to diversify their portfolios to earn profits. Microloans offer a better lending experience to investors to help people in need and a terrific option to find success. 

Principles of Microfinancing

Even though microfinancing may seem new to many, it has been around for quite some time and is different from traditional bank loans. 

How Microloans Are Funded

The most significant difference with microloans is how they are funded compared to traditional loans. 

Microloans are small loans that investors fund so borrowers can quickly get the money they need. Traditionally, loans get funded by banks and other financial institutions that have a large amount of capital backing the loans. 

Since investors are backing these loans, they are smaller than traditional bank loans, hence why they are called microloans. Smaller loans can help borrowers get what they need quicker and easier than larger loans which are more common. 

Since microloans are funded by investors this way, they offer much more flexibility and more unique features that traditional loans cannot. The bank does not care whether borrowers can get to know the person lending them money and showing them who they are, but that’s not the case with microloans. When someone needs their loan funded quickly, even if they are not the most qualified to receive that loan, they can still plead their case to microloan investors to get the necessary funds. 

Working with investors instead of large banking institutions opens the door for more possibilities for people looking to borrow money. 

How Microloans Help Investors Profit

While borrowers get the money quickly when they need it, investors also get to profit when they invest in microloans

Microloan investing allows investors to set the terms and fees associated with borrowers paying back the loan. Investors can think about the risk involved with giving money to specific borrowers, allowing them to decide how much they want to charge each person. They get the opportunity to make a nice profit if someone is not a great borrower, while someone who is outstanding and pays back quickly can have lower fees. 

The profit available to investors is excellent for those who are willing to take some risks with their money. Since the investment they choose depends on the borrower, it changes the process compared to traditional investments. The money-making success becomes the investor’s responsibility, more so than other forms of investments. However, this allows investors to be more successful when they manage the investment and make more money. 

Helping Both Investors and Borrowers

The biggest reason microlending has become popular is because it has features that help investors and borrowers. 

Microlending benefits investors by giving them a new opportunity to make money and helps borrowers get the small loans they need. Both parties can get what they need when they work together to get the loan set up and paid off. That is similar to traditional loans, but microloans are on a personal level and help people in a very different way.

Where bank loans focus solely on how borrowers pay them back, microloans concentrate more on helping borrowers and working with them to get what they need. An investor is much more likely to understand a borrower’s situation when they need more time to pay or assistance, making it a more laid-back way to lend and borrow money. 

When someone is looking for a new investment opportunity or an easier way to borrow money, microlending is a fantastic opportunity for either option.

Is Peer-to-Peer Lending Better? 

Peer-to-peer lending might be better for people to invest and borrow from, but it depends on what you need from your loan.

As mentioned, microlending is much more flexible than other forms of investing that most people decide to use. Instead of having a rigid loan that leaves no room to breathe for the borrower, microloans can get the loans everyone needs in their unique situation. With microlending, the main goal is to make the entire loan process more manageable than traditional lending.

Often, borrowers have to take out large loans than they need from banks. That causes a big issue because they are paying back a large loan they do not want. When borrowers pay more than they need to, it usually is not a comfortable process throughout the loan term. 

Deciding if peer-to-peer loans are better depends on the situations a borrower or investor is currently facing. 

Microloans are best for people looking for small loans with comfortable payoff terms and conditions. Depending on the amount, a borrower may work with the investor to pay off the loan faster than usual. If the loan is only $200, a borrower can pay it off as soon as possible so the fees are lower and the loan is out of the way faster. However, if someone needs a loan larger than $2,000, microloans are not an option for their situation. 

On the other hand, for investors, microloans are a tremendous opportunity for a small investment that can help people get started. Microloan investing is good when someone is new to the investing world because they are less volatile and allow people to start with smaller amounts. Many new investors want to have a lot of money in reserve when investing, so they do not lose a lot if it does not work out. 

With microlending, you can start with as little as $100 and stay assured you will earn it back by setting up a contract with the borrower. It is much easier to get started investing like this because there is less money involved and also less risk compared to traditional investments. One downside is that investors will have to trust the borrower and the platform they are using to invest in microloans. 

How Is Microlending Changing The Financial World?

Many investors and borrowers wonder how microlending is changing the financial world. 

Microlending is opening up new paths for people to get the money they need differently than usual. Instead of being stuck in the same process forever, new formats like microlending create more opportunities for people. Many loans require strict credit checks and challenging prerequisites that disqualify many people from receiving loans. Without microlending, the change in lending would not be possible, and the process would stay the same. 

For investors, investing in microloans is a new opportunity quite different from other forms people usually use. Many invest their money in the stock market or new business ideas wanting to get started. While these investments are straightforward and known to make large profits for people, they are unpredictable and carry high risks. 

The stock market changes constantly and is fantastic for long-term investments since they will grow over time. With new business investments, there is nothing in place to guarantee that the business will make a big profit and guarantee an investor their money back. These investments will always carry high volatility and cause more uncertainty than microloans. 

If an investor does not want to be patient, then investing in the stock market or a business venture is not a viable option. Microlending opens up new opportunities for short-term investments that can guarantee profit compared to traditional investments. When an investor sets the fees at the beginning of the loan term, they will set out the exact earnings they will receive. That way, the profit margin is guaranteed as the borrower pays the loan back. 

Microfinancing makes investors a quick profit while helping borrowers get the small loans they need.

Microfinancing Made Easy

Whether you want to invest or borrow money, you can experience microlending today with Lendee!

Lendee is a trusted peer-to-peer lending platform that helps connect borrowers and investors while facilitating the complete loan process. Instead of handling everything without help, the borrower and investor have protection throughout the loan term. Also, Lendee helps investors determine which borrowers will work best for them based on the criteria they want.

The best part about Lendee is the features to help borrowers and investors, like the Lendee score. The Lendee scores of the borrowers are determined by evaluating their credit scores, spending habits, and response time. Instead of wondering how reliable each person is, the Lendee score creates a smoother process for investors to make informed decisions. 

Check out Lendee today or download the mobile app to get started!