Soft credit is a type of credit in which the lender offers very favorable conditions to the borrower.
The favorable conditions enjoyed by the borrower are usually, mainly, of two types:
- Low interest rates. Soft loans can generate very low interest rates, lower than market interestrates (that is, the rest of the other credits). This is a favorable condition since the cost to the borrower is lower than in other types of loans.
- Broad return terms. The repayment terms for soft loans may be higher than for other credits in the market. In this way, the borrower has more time to return the credit, which translates into an advantage for the borrower.
Soft credits can have the two previous conditions or one of them. They might even have other advantages, although the most common are the previous ones.
Characteristics of soft loans
The main characteristics of soft loans are the following:
- The most important feature is its favorable conditions,which are usually related to low interest rates or extended repayment terms.
- The lender is usually a public financial entity, since soft loans do not have the main purpose of obtaining profitability . For this reason, private financial institutions do not usually offer this type of credit (since their main objective is to obtain benefits), although sometimes public entities encourage private banks to grant soft loans.
- Usually, the granting of these credits is usually related to an objective, usually of a social nature. That is why it can be said that soft loans are usually covert subsidies.
For the rest, soft loans have the same formal characteristics as other credits.
Purpose of soft credits
As we have commented previously, soft loans do not have an economic purpose, that is, their main objective is not to obtain profitability. This is logical, since the main characteristics of these credits are their favorable financing conditions.
Therefore, the main purpose of soft loans usually has a social character, to favor certain social agents. There are many examples of this: soft loans for companies (conditioned on the realization of a series of investments), soft loans for people with certain economic difficulties, etc. Therefore, soft loans usually come from government funds, granted directly by public financial entities or indirectly through private financial entities.