What Is the Difference Between Crediting and Microcrediting?

In the modern world with hundreds of different lending options, it becomes difficult to understand what is what. Often, misconceptions lead to great problems: debt, poverty, and much more. Anyway, it’s easy to avoid such issues. If you understand how bank loans and credits work, if you know what you need the money for, there will be no problems. Today, we’re going to help with the first touchpoint and tell how different types of lending work.

In this article, we will use different terms related to financial markets and the lending institute. Due to the fact that the guide focuses on the difference between levels, let’s agree to use credits/microcredits and loans/microloans as synonyms even though they are not the same. Wherein, distinguish financing/microfinancing and crediting/microcrediting because these terms represent two arrays of different sizes.

Don’t worry, it will be simpler. Let’s start with the basics, as for now.

The History of Loans and Credits

To begin with, here are traditional loans and credits. Put very simply, these categories refer to one idea: a person or a company grants the money to another person or a company with the obligatory return condition. When the loan/credit is granted under a 0% interest rate, the borrower must return exactly the same amount. In all other cases, he/she must return the initial amount plus predefined percentage of this sum.

Loans originated a long time ago. It’s barely possible to say who was the first lender or borrower but these people didn’t know about money at all. Loans of the past were based on the barter. Today, they are all about finances. There are a few basic types based on features:

• Collateral:

• • • Secured. Require collateral and come with better rates.
    • Unsecured. Don’t require collateral so conditions are worse.

• Lender:

• • • Governmental. Issued by government-controlled companies.
    • Private. Issued by non-government organizations and persons.

• Purpose:

• • • Appliance. Often, require to pay for something in installments.
    • Auto. Allow purchasing new or used cars and other vehicles.
    • Business. Deliver money for business development or recovery.
    • Debt consolidation. New loans to return old loans with interest decrease.
    • Education. Help to pay tuition fees of a borrower or his/her relatives.
    • Mortgage. Used to purchase a new house or apartment.
    • Multi-purpose. All personal loans without purpose limitations.

• Term:

• • Short-term. From 1 week to 1 year.
  • Mid-term. From 1 to 3 years.
  • Long-term. From 3 to 20 years and more.

The main difference between credits and loans is about repayments. When one takes a loan, he/she must return the whole sum. When it comes to crediting, a borrower can get the upper limit but he/she doesn’t have to fill it fully. Let’s take $100,000. When you apply for a loan, you understand that $100,000 must be returned. But when you get a credit card with a cap of $100,000, you can get and return $5,000 or $10,000 or any other sum.

Key takeaway: traditional financing consists of several types, including microfinancing. It’s a larger category with more diverse options.

Two Sides of Microcrediting

On the contrary, microfinancing is a narrower industry that historically was focused on one specific goal – to help people in need and fight poverty. Muhammad Yunus, the inventor of the Grameen Bank and father of modern microfinancing, wanted to help poor rural people with small low-interest loans. According to his idea, this financial support had to act as a springboard for new businesses. Sadly, it turned out that not all poor people are talented entrepreneurs…

Today, microloans and microcredits are highly-popular financial tools in countries with weak economies. A lot of lenders offer quick cash to people with a low credit score, no official employment, insufficient income, etc. Most often, these loans feature very high interest rates. Moreover, there are loan sharks – partially-legal companies that offer the highest interest and use strict and even cruel methods of collection.

When we talk about legal microfinancing, the situation is more optimistic. Trusted companies help to cover urgent expenses, including medical operations that can save a borrower’s life. But all micro-lenders list short terms and relatively high rates.

Key takeaway: microfinancing includes microcredits and microloans only. It acts as a subset of traditional financing.

Key Differences

With the descriptions in mind, let’s move to three major differences between loans/credits and microloans/microcredits. They are essential to remember to avoid wrong understanding. With this info, you will be able to apply for the most suitable loan depending on your goals.

1. Purposes

When it comes to microfinancing, there are two types of firms:

1. Private lenders that work with individuals. Allow spending money as a borrower wants. These companies don’t track the expenses but often have strict repayment rules.
2. Lending groups that work with businesses. Limit the list of purposes. For instance, they don’t allow to use microloans to cover previous debts.

Wherein, traditional lenders often pay more attention to money usage. Even personal loans/credits can be controlled. In this case, private micro-lenders are more preferable for people who want to get a multi-purpose loan.

2. Requirements

As a rule, microfinancing firms come with more favorable requirements than larger companies. Some of them even don’t ask to provide any documents except for an ID. However, we’d suggest staying away from these firms as they may be fraudulent. But even legit companies have fewer rules related to income proofs, credit scores, and other documents. For this advantage, borrowers must pay later as they face higher rates.

3. Terms & Conditions

Finally, the main difference between traditional and micro-lenders. Let’s look at each point:

• Amount. Microcrediting approach features lower limits, both maximum and minimum. Clients can get as low as $100. For personal microloans, the upper cap is around $20,000-$30,000 while business microloans may go up to $500,000. Traditional lenders have minimum limits of $5,000-$10,000 and maximums at $1-2 million and more.
• Interest. For higher convenience and lower requirements, microfinancing teams take a higher interest. Usually, legal and registered lenders set rates at 8%-16% but loan sharks can exceed 100% and even 1000%. Traditional companies often don’t go higher than 10% annual percentage rate.
• Term. Most likely, you will find short-term microloans. According to our previous classification, short term is from 1 week (so-called payday loans) to 1 year. On the contrary, big banks and companies have wider limits that can go up to 20 years. It also depends on the loan’s/credit’s purpose.

Wrapping Up

Generally, the lending concept includes several models. Credits and loans are the most popular options that provide for getting the money on trust. These large categories include microcredits and microloans, respectively. Compared to traditional lenders, microfinancing organizations focus on individuals and small businesses only. They deliver smaller amounts for shorter terms with higher interest rates.

Overall, microcrediting is a part of crediting targeted at customers who need quick small loans and/or can’t meet the strict requirements of traditional firms.