Digital Bank Loan vs Microlending

Acquiring a loan is almost an inevitable part of one’s financial journey. These days, there are numerous options for acquiring loans and credit. Options range from banks to individuals willing to lend you money, each have their own benefits and challenges. Learn the differences between microlending and digital bank loans.  

This is one way to help borrowers who lack credit history to have access to loans. Here are some of the basics about microlending.

• Microlending refers to small loans or microloans extended by individuals or organizations, which can range from pawn shops to NGOs and more. More often than not, the amount of credit being loaned is lower than what traditional banks offer.
• These types of loans are usually granted to and availed by those with limited access to credit from traditional banks. While traditional banks require more documents when applying for a loan and rely heavily on your credit score, microloan application requirements are easier to provide.
• A smaller loan usually leads to higher interest rates. This is due to several reasons; a higher risk for the lenders, higher operating costs, and the need to be able to support the sustainability of the organization and generate reasonable profit.
• A collateral is usually not required when applying for a small loan. However, some microlenders would look into alternative collateral, such as payroll ATM cards.
• Microloans are more commonly used for urgent and immediate funding needs such as school fees, motor repairs, or hospital bills.

Since most Filipinos own a mobile phone, banking and acquiring credit has become more accessible through digital banks. Here are some of the basics about digital bank loans.

• A digital bank loan has an easier all-digital online application process, making it accessible anywhere, anytime. On the other hand, traditional banks and even a number of microlending organizations require the borrower to submit various documents in person.
• There are more options with a digital bank loan. They offer higher loans along with lower monthly add-on interest rates compared to microloans.
• A digital bank loan is a service that can help borrowers finance investments. More often than not, this type of loan is used to start a business, pursue further education, fund home improvements, and more.