What are the typical interest rates and repayment terms for microfinance loans?

Microfinance loans usually have interest rates typically ranging from 15% to 26% annually. The exact rate applicable will depend on the applicant's income stability, credit profile, location, loan amount, and tenure.

Higher income volatility or poor credit repayment history may attract rates closer to the upper end of that bandwidth. Similarly, smaller towns and rural areas have marginally higher pricing due to operational constraints for the loan provider. Loan amounts below ₹25,000 and tenure under 1 year also see elevated rates.

Although the interest rates may seem elevated compared to traditional banks, they adequately cover the higher risk and costs involved in serving low-income segments. These loans often bridge the gap for applicants excluded by formal financing channels.

Repayment terms are quite flexible for microfinance loans. While the standard tenure offered is 1-2 years, customised structures aligned with the borrower's cash flows are possible. For example, farmers may get 1-year loans with no instalments during sowing/harvesting seasons.

Others may opt for weekly or monthly repayment cycles through cash, checks or auto-debits. Small business owners also get to choose from bullet repayment loans with a lump sum payment at maturity.