Micro Loans vs Personal Loans: Which One is Right for You?

Both micro loans and personal loans can be used to meet capital requirements for business. However, there are stark differences between the two. For example, micro loans can be secured or unsecured, whereas personal loans are always unsecured (collateral-free) loans. In this blog, we have debunked the difference between micro loan and personal loan so you can make informed decision.

Understanding Micro Loans

Micro loans are designed to provide financial assistance to individuals who may not qualify for traditional bank loans due to various reasons such as lower income levels, lack of credit history, or limited collateral. These loans are usually offered by microfinance institutions (MFIs) and Small Finance Banks like Ujjivan SFB.

Micro loans have several distinguishing features that set them apart from other types of loans:

1. Loan Amount: Micro loans are generally small loans ranging from ₹5,000 to ₹3 lakh. These amounts may seem relatively insignificant compared to personal loans, but they can make a significant impact on individuals who need immediate access to funds for urgent expenses.
2. Interest Rates: Micro loans often come with higher interest rates compared to personal loans. This is because lenders bear higher administrative costs associated with processing smaller loan amounts and working with borrowers who may have a higher credit risk. However, interest rates can vary depending on the lender and the borrower's creditworthiness.
3. Repayment Terms: Micro loans typically have shorter repayment terms ranging from a few months to 3 years. This allows borrowers to repay the loan quickly and avoid long-term debt obligations.
4. Collateral Requirements: Micro loans are often provided without any collateral requirements or with minimal collateral. This makes them more accessible to individuals who do not own valuable assets.

Example: Let's say Ramesh, a small business owner, needs ₹30,000 to purchase inventory for his shop. Since Ramesh doesn't have any valuable assets to offer as collateral and needs the funds urgently, he decides to apply for a micro loan.

Understanding Personal Loans

Personal loans are unsecured loans that can be used for various purposes such as financing home renovations, funding education, or meeting any financial requirement. The interest rates are higher than home loans with repayment tenures of up to 5 years. 

Here are some key features of personal loans:

1. Loan Amount: Personal loans offer higher loan amounts compared to micro loans. Depending on your income level, credit score, and repayment capacity, you may qualify for personal loans ranging from ₹10,000 to ₹10 lakhs or more.
2. Interest Rates: Personal loan interest rates can vary based on several factors including the borrower's credit score, income level, and relationship with the lender. Generally, personal loan interest rates are lower than micro loan interest rates due to the larger loan amounts involved.
3. Repayment Terms: Personal loans come with longer repayment terms ranging from one to five years or even more in some cases. This allows borrowers to spread out their repayments over a longer duration, making it easier to manage their monthly budgets.
4. Documentation Requirements: Personal loan applications require borrowers to submit various documents such as proof of income, bank statements, identity proof, and address proof. The documentation requirements for personal loans are more comprehensive compared to micro loans.

Loan Comparison Table Between Micro Loans vs Personal Loans