Ever heard of a microloan? Did you know that Hillsdale College offers one?
Also known as the Will Carleton loan, the college’s microloan lends a small sum of money to students who need immediate cash for a school-related emergency, whether that be books for the new semester, an unprecedented hefty library fine, or a utilities bill if you live off campus. You’re expected to pay back the loan without interest within a few months, but the Financial Aid Office will help work out these details.
But the concept of a microloan isn’t new.
In the United States, microloans are usually provided just to small businesses and entrepreneurs.
The U.S. Small Business Administration provides funds to third-party lenders to offer microloans of values up to $50,000 for startup businesses and nonprofit child-care centers that meet specific qualifications. There are also dozens of nonprofits providing microloans to entrepreneurs and small businesses independently of the SBA. The Association for Enterprise Association reports that U.S. microloans can be as small as $500, and that the average amount of a microloan is $7,000.
But the concept of microcredit originated with the Grameen Bank in Bangladesh, founded in 1976. The Grameen Bank sought to alleviate poverty in Bangladesh by providing small loans to individuals who didn’t have collateral or credit history. The bank’s goal was to encourage individuals to involve themselves in business ventures and contribute to the economy and pull themselves out of poverty. Because the project was largely successful, the bank’s efforts earned it a Nobel Peace prize in 2006.
A microloan is different from a bank or credit union loan because it doesn’t require the borrower to provide credit history or collateral (collateral is just something the borrower pledges to pay the bank if he defaults on the loan). That’s why microloans are so popular with entrepreneurs and with individuals in developing countries. Microloans provide necessary funds to those who need them but may be rejected by a bank. A bank might not take the risk on an entrepreneur, but a microlender will.
In the U.S., microlending institutions usually offset the cost of providing microloans by also providing financial literacy courses or business consulting services to their borrowers. The Grameen Bank uses a tactic called solidarity lending: Individuals borrow money as a group, then hold each other accountable to repay the loan. This can help remove the need for collateral from borrowers.
At Hillsdale College, you can save your credit report by taking out a microloan to pay that utilities bill. So next time you have a financial emergency and need cash fast, talk to Financial Aid. If not a microloan, the office is always eager to help.