Microloans are not simply charitable donations, but actual investments or business arrangements where there is some risk involved. Unlike regular loans though, the people who take out microloans usually can’t offer any typical type of collateral – something like a house or car that the bank could seize if the person defaulted on the loan. What motivates people to pay back microloans is a combination of a desire for a better life and, frequently, a commitment to other people in a lending group. For example, many micro-lenders are a part of a group that commits to paying back the loan. This means that if one person “defaults” the rest of the people in the group are responsible for covering their share. Not only does the borrower make a commitment to the institution lending the money, but also their friends or family. Talk about peer pressure!

Paying back a microloan means more than just fulfilling an obligation – it’s the honor of keeping your word and could mean a successful entrepreneurial venture and more money in the home. That may be why the payback rate is so high for microloans – there is actually a lower default rate for microloans than there is for student loans in the U.S.!  If you think it’s acceptable to take a “chance’ on an American student’s college education, then helping a man or woman provide for a family might be a no-brainer.

Tags: microfinance, microloan, poverty cause