Loans with softer terms have longer repayment periods than the majority of commercially available loans. They may have extensive grace periods before repayment begins, below-market interest rates, and are also known as “concessional loans.
Definition and Examples of Soft Loans
Compared to loans at the market rate, soft loans provide more flexible repayment alternatives. Usually, they are produced by governmental organizations or educational facilities.
- Alternate name: Concessional loan
While most loans are provided by lenders with the intention of making a profit, soft loans are provided for various purposes. Soft loans may be applied to catastrophe relief, such as the rising refugee crisis, and to reinforce or erode international alliances.
For instance, in 2021, Eswatini was granted a soft loan from the Export-Import Bank of India in the amount of $10.4 million to build a disaster recovery center.
The Export-Import Bank of Thailand also launched a soft loan program for companies affected by the COVID-19 situation. Borrowers had a seven-year repayment period and a special interest rate of 2% per year for the first two years on these loans. For the first six months, there was no money due.
How Do Soft Loans Work?
Compared to conventional funding sources, soft loans feature far more benevolent payback terms. Typical traits include:
- Long grace periods before borrowers are required to start paying
- Interest rates that are below market rates
The money from soft loans is frequently required to be used for a particular use, such as aiding refugees or making investments in infrastructure, agriculture, or information technology.
Soft loans often have a repayment schedule and may even offer 0% financing, as most loans do.
The International Monetary Fund (IMF), which provides soft loans through three distinct lending programs: extended-credit (ECF), standby-credit (SCF), and rapid-credit (RCF) facilities, is a good example of a provider of soft loans with 0% interest rates:
- ECF: 0% for a limited time, no payments due for the first five-and-a-half years.
- SCF: 0% interest for a limited time, no payments due for the first four years.
- RCF: Permanent 0% interest rate, no payments due for the first five-and-a-half years.
Who Offers Soft Loans?
Typically, soft loans are provided by governmental and developmental organizations. Soft loans are provided by organizations or federal agencies such as export-import banks and institutions like the IMF. These organizations decide the loan’s conditions and agree on them with the borrowers.
Do Soft Loans Offer a Return?
Soft loan recipients may have prospects for economic growth, but soft loan lenders may not receive a return on their investment for years, if ever. Additionally, in some circumstances, borrowers may get overburdened with payment commitments, which may worsen rather than help their financial status.
For instance, due to increasing financial pressure, Ethiopia had to renegotiate some of the terms of soft loans that China offered.
Soft loans are often not intended to turn a profit, thus the government agencies and developmental organizations that provide them may be amenable to forgiving outstanding debt.
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