Microcredit for unemployed people: how small loans work and where to find them

Small loans with a purpose

Microlenders do not ask whether you have a salary. They ask whether a specific plan can generate enough income to repay a modest loan. For a jobseeker with a trade, a tool to buy or a market stall to open, that question is easier to answer than a bank's.

The trade-off is purpose. Microcredit is meant for an activity, so it is a poor fit for covering ordinary household bills.

Support often comes with the money. Many microlenders pair the loan with coaching or training, which can be as valuable as the capital for someone starting a first venture.

A crowd-lent model in the United States

Kiva makes zero-interest loans to US business owners who live and operate in the country. Loans range from $1,000 to $15,000, or $1,000 to $3,000 if the business is verified by alternative proof. It states there is no interest, no fees and no collateral, and no minimum credit score.

The process asks effort: a story and a photo, a private fundraising period of up to 15 days with roughly 5 to 40 lenders, then up to 35 days publicly. Funding is all or nothing. Approval is described as typically taking 20 to 25 business days, so it does not suit an emergency.

Express microcredit in France

Adie describes its express microcredit as open to all situations, jobseekers included, for a business project banks are unlikely to fund. It lends up to €1,000 over 8 to 12 months, with no guarantor, an answer within 24 hours and funds released within 48 hours of approval.

There is no interest rate, but a flat solidarity contribution applies. The published example: €500 over 8 months costs €68 a month, a flat €44, equal to an APRC of 22.9%. That figure shows why the total cost must be compared even when no interest is charged.

Community lenders in Great Britain

Responsible Finance is the trade body for community development finance institutions, locally rooted social enterprises that lend to people and businesses refused by mainstream lenders. It refers people who need a simple, affordable loan to its finder tool.

The page does not say whether each lender serves people on low incomes or benefits, so the right step is to ask the lender directly about eligibility, rates and any support offered with the loan.

Judging the cost

Microloans are small, so fixed contributions can look steep as a percentage while remaining modest in money terms. Compare the annual percentage rate, the total repayable and the term, and ask what happens if a payment is missed.

Be careful with phrases such as zero-interest or low-cost: they describe a feature, not the whole price. Ask for the cost of any insurance and for confirmation that early repayment carries no penalty.

If the plan depends on a single customer or a single season, build a margin for the slow months. Missed instalments at a microlender are usually followed up personally, so talk to the adviser before a payment is missed.

• Total repayable against the sum received.
• Rate or equivalent, with every mandatory fee.
• Early repayment terms.
• Whether a guarantor or collateral is needed.

Eligibility traps

Rules exclude some people. Kiva, for example, does not accept applicants in bankruptcy or foreclosure, rules out several kinds of business and requires a PayPal account for payments. Other lenders ask for a residence permit or a local tax return.

Read the criteria before spending time on a business plan, and keep documents such as identification, proof of address and recent bank statements ready.

Illustrative scenario

A laid-off baker wants a second oven to take wholesale orders from home. A microlender may judge the plan from past customers, a written budget and a realistic sales estimate, even though there is no pay slip.

Before applying, the baker checks the instalment against the weakest month of expected income, not the best, and asks whether coaching is offered. This example is illustrative only.

Applicants outside the three countries described here should look for a locally regulated microfinance body, and ask a social worker or advice centre which ones are trusted in their area.

Scams posing as microloans

Anyone asking for a fee to release a microloan is not a lender. Legitimate organisations publish their conditions, are identifiable and are regulated in their country. If an approach comes by message from someone you never contacted, treat it as suspect.

Debt already out of control needs advice before any new loan. Free services such as StepChange in the UK can help.