A soft loan is basically a loan with an interest rate below the market rate. This is sometimes referred to as “sub-prime lending.” Many times soft loans offer certain concessions to potential borrowers, like long repayment terms or interest-free payments. Soft loans may be offered by governmental entities for projects they feel are worthy.
In the United States, there are currently eight publicly funded programs that offer various forms of soft loans. These include the Federal Housing Administration, the HUD, the Veteran Affairs Department, the Environmental Protection Agency, and the Transportation Development Administration. In each of these cases, the government considers various factors in determining whether or not to approve a borrower to apply for this type of financing. For example, if the borrower has filed bankruptcy, if the borrower has a poor credit score, or if the borrower does not meet any of the other criteria available, he or she may still be able to receive approval.
The United States government often provides this type of funding for projects in underdeveloped nations. For example, in Ethiopia, a private organization, the East African Eco Exchange, administers a program that encourages businesses in the area to develop a low-income housing development. At the same time, another group of individuals, called the East African Youth Entrepreneurs, administers a similar housing development in Ethiopia. These two groups often come together to offer generous terms to a potential borrower. As with the United States, both groups have experienced problems verifying the claims of the borrowers they are providing financing to.
These loans can be of varying types. The most common form is the business-to-business soft loan, which is provided through private lenders. The United States government sometimes provides some type of small-business soft loan for projects related to economic development. A private lender may also provide a nonrecourse option, which means that if the borrower defaults on the loan, the lender does not have to repay any of the interest paid by the borrower.
Another popular type of financing for projects in developing nations is the below-market-rate (ARM) soft loan. An ARM loan usually offers generous terms, as the lender compensates for the risk of providing such financing by charging a lower interest rate than would be charged by an establishment willing to accept a traditional commercial loan. The terms often include a long grace period during which the borrower pays nothing but interest and principal. This grace period is often tax deductible.
The United States has sometimes provided this type of financing for specific projects in developing nations. In between World War II and the end of the Cold War, the United States provided such soft loans for projects in various African countries. In these cases, the government agencies that handled the financing process did not necessarily purchase the property directly from the owners. Instead, they would often buy the property through a subsidiary company that was established in the country itself. This system benefited both the United States and the local economy, learn more as American companies were able to buy properties for far less than they would pay in the United States, while Africans had access to capital that could help to develop their own economy.
Today, a similar set of financial institutions, called “pre-mixed credit” institutions, are starting to enter the scene in foreign countries. These institutions do not act like traditional banks, but they do offer a range of lending opportunities. Many of these soft loans can be used to provide infrastructure upgrades in a recipient country. In some cases, they can even provide the cash needed to finance a project or to complete one.
While soft loan financing from the United States is not as widely used as it was in the past, it can still play a major role in sustaining development in a developing nation. If approved by a lender, it can provide the cash needed to improve school quality, create affordable housing and create jobs. In many cases, this type of financing can provide the cash needed to implement projects that would otherwise be considered too costly to complete. It is also helpful in ensuring that the right projects are included in sustainable development plans.
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