Micro loans are a relatively new financial instrument and asset class, if you will, of their own. These are focused on both individuals and companies, and essentially provide them access to immediate loans with which they can use to invest however they see fit.
But what they are, how do they work and how can they be effectively managed, to get the right benefit from personal financial management.
What are micro loans and how do they work?
Micro loans are loans that are usually granted to individuals or SMEs to finance commercial projects in the case of small and medium-sized enterprises; And for the acquisition of useful goods, in the case of persons.
They function similarly to the rest of commercial loans. Where the person or company requests such or such amount; The banking institution evaluates who makes the request, and if it is approved (a) then it gives the total amount, although in other cases it may be partial. However, the primary difference lies in the terms and amounts of the negotiation.
Micro loansare characterized by small amounts and the type of negotiation involves certain levels of flexibility as to the rate and time at which the loan is developed. That is, as it is focused on people and SMEs, the requirements, regarding other types of loans, are different.
As this type of loan opens the possibility to people and companies that do not usually qualify for loans in commercial financial institutions, to be able to finance useful assets, in the case of people, and business development for the SME issue.
It is valid to clarify that useful goods are those that function, to a certain extent, as collateral. That is to say, it is not usual that this type of micro loans are approved for vacations or for studies, but that they focus on tangible things like appliances, improvements to houses, acquisition of vehicles, etc.
Especially for the issue of time that is decisive and strategic in the context of microcredit, because they are framed within the short term. That is, these loans focus on “fast” events; And when we speak of rapids is not that they are without thinking, but are linked to acquire goods that do not extend to more than a year.
How can you manage micro loans effectively?
For this we have to start from two basic premises:
The availability refers to the capacity you have to take on a micro loan. It is the level of indebtedness you can bear. This comes from the hand of an analysis that you must carry out; Where you take into account the liquidity that you handle. And it is a combination that relates the level of current debts, fixed commitments or expenses, and ability to generate income.
Since, although it is for a relatively short period, it does not remove the fact that there is a fixed fee to pay during that time. Therefore, availability will show whether the loan you are thinking about will negatively or positively affect your personal financial structure.
And in this you must be cautious because something that may seem simple and simple, can become a big problem if you do not know how to handle it. That is, a smaller loan like this, when you do not give the rigor of place then you can “get the shot back.”
So the issue of availability is key to this whole process; Because based on this is that you can know if you are able to settle the credit you have assumed. And if you manage the right level of liquidity. That is why it has to be part of the analysis that you carry out, because of its importance and relevance within the entire structure to take on a short-term loan like this,
Time is the second relevant factor in the proper management of microcredit. The reason is that to the extent that time is lower then you tend to pay less, but the monthly fee is higher. While on the other hand, as far as time distances, although the fee is lower, at the end of the day, you will pay more.
Time is money
That is why it is necessary to identify the optimum point of the debt, where you manage to agree a space of time that allows you to have comfortable installments, but that does not affect your financial structure of liquidity. Since if you only take into account that the fee is low, you can pay two or even three times for something that could have been paid in a shorter time.
Therefore, the range of time you choose, based on your availability and the way your personal financial management is structured, will make you able to get out of this loan.
In that vein, the tool that can best serve you in this micro loan issue is the budget. Since it combines current reality, it serves as a basis for planning; And allows you to stage future realities or make projections.
Micro Loan strategy
Therefore, the strategy for analyzing the micro loan you are going to access will be to prepare a budget for your current reality without loans, and attach to it, other fictitious or potential realities. Where you access the credit including the monthly fee, and each of them will do it starting different periods of time to pay off the loan.
That is, you are going to measure how it affects your current financial situation to take a loan with the rate “X” to “X” time, and based on the results of this you can identify which of all the times and amounts best suits your capacity Of payment.
When you manage to stage and compare with your current reality you will have a panoramic where you can identify which of the alternatives fits more to your availability and that fits better in your time.
In this, undoubtedly, the tool that favors you is an electronic spreadsheet, but if you are one of the people who prefer to write on paper, then look for a notebook with enough sheets so you can play different future realities.
Micro loans become a viable option for people who need to take on a smaller loan with flexible requirements and easy access to people. Nevertheless, it is important and decisive for the success of this process that you can match the availability and the adequate time, so that you can solve the commitment without this representing greater incidences.