What Is a Soft Loan?

Soft loans are loans with more generous repayment terms than most commercially available loans. These are also called "concessional loans" and can have lower-than-market interest rates and long grace periods before repayment begins. Soft loans are often offered by governments, government agencies such as export-import banks, and development institutions to help developing nations cope with crises.

Definition and Examples of Soft Loans

Soft loans offer more generous repayment options than market rate loans. They are usually produced by government agencies or development institutions.

  • Alternative name: concessional loan

Although lenders offer most loans for profit, they offer concessional loans for other reasons. Soft loans can be used to deal with disasters such as the growing refugee crisis and to strengthen or weaken alliances between nations.

For example, in 2021, the Export-Import Bank of India agreed to provide a subsidized loan in the amount of $ 10.4 million to Eswatini to build a disaster recovery site. The Export-Import Bank of Thailand also established a subsidized loan program for companies affected by the COVID-19 crisis.

These loans had a special interest rate of 2% per year for the first two years, and borrowers could repay the amount borrowed within seven years. No payments were due for the first six months.

How do soft loans work?

Soft loans have much more favorable repayment terms than traditional sources of financing.

Common features include: Long grace periods before borrowers have to start making payments Interest rates below market value In many cases, borrowers must use soft loan money for a specific purpose, such as helping refugees or investing in infrastructure, agriculture, or information technology.

Like most loans, soft loans typically have a repayment period and can even provide 0% financing.

A good example of a 0% soft loan provider is the International Monetary Fund (IMF), which offers soft loans through three different loan programs: Extended Credit (ECF), Standby Credit (SCF), and Credit fast (RCF). ) facilities:

ECF: 0% for a limited time, without payment for the first five and a half years.

SCF: 0% interest for a limited time, with no payment for the first four years.

RCF: permanent interest rate of 0%, with no payments due for the first five and a half years.

Who offers concessional loans?

Government agencies and development agencies often make soft loans. Banks and export-import groups like the IMF are examples of federal organizations or agencies that offer subsidized loans. The terms of the loans are defined by these agencies and negotiated with the beneficiaries.

Do Soft Loans Offer a Return?

While soft loans can provide economic growth opportunities for beneficiaries, lenders who do so may not get positive returns on their loans for years, if they ever do. And, in some cases, borrowers can be burdened with payment obligations, which can make their financial situation worse rather than better.

For example, Ethiopia had to renegotiate some terms of subsidized loans that China provided because the African nation was under increasing debt pressure. Since the purpose of soft loans is generally not to generate profit, government agencies and development institutions that make them may be willing to forgive outstanding loans.

Enjoy Watching This Video About Soft Loans

Source: The Audiopedia

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