What is Soft loan ?
A liberal loan or a soft loan is a loan with no interest or interest rate below the market rate.
In other words “soft financing” or “concessional funding”.
Soft loans have generous terms:
such as an extended grace period in which only interest or service charges are payable, and interest holidays.
They generally offer longer amortization programs (in some cases up to 50 years) than traditional bank loans.
Soft loans are given by multinational development banks.
Such as the Asian Development Fund, World Bank affiliates, or federal governments (or government agencies) to developing countries that would be unable to borrow at market rates.
How soft loan works?
Soft loans are often offer not only to support developing countries.
But also to build economic and political ties with them.
This often occurs when the borrowing nation has a resource or material that is of interest to the lender. which seeks not only repayment of the loan but its favourable access to that resource.
In short:
- A soft financing or soft loan is a loan that offers no- or no-interest, along with an extended grace period, offering a higher discount than traditional loans.
- Many developing countries need money but cannot afford to borrow at market rates.
- In the case of government lenders, soft loans used to create a relationship between the lending and the borrowing countries.
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