Microloan (payday loan)
A microloan is a small loan for a short term, often until the borrower's next paycheck, issued quickly and with minimal paperwork at a higher price than a regular loan.
In plain words
A microloan covers a short gap: rent due before payday, a broken phone, an urgent trip. The amount is small, the term is days or weeks, and the decision is fast, often within minutes. The same speed and the lack of collateral make it expensive. The lender prices in the risk that a share of borrowers will not return the money on time.
How it looks in practice
A borrower takes 300 for 30 days. At the end of the term they owe the principal plus interest for every day of use. If they cannot pay, they may extend the loan by paying only the interest, and the principal stays in place. On an annual basis such loans can show a very high effective rate, even if the daily rate looks modest.
Why it matters to an owner
A microloan business lives on volume and speed, and its margin is eaten by overdue debt. Two numbers decide the outcome: how many first loans come back on time, and how many borrowers return for a second one. The first depends on scoring and on clear, timely reminders. The second depends on how the borrower was treated the first time.
Common risk
Chasing approvals and forgetting the debt-to-income check. A borrower who already carries several short loans may take one more only to close another. Such a loan looks healthy for a week and then falls into a chain of extensions and overdue days. Rules on rates, fees and collection of microloans depend heavily on the country, so terms should be checked with a lawyer.
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