Via Wiki­media Commons

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.