It is called micro lending for its small amount. Popularized by Indians residing in the Philippines, micro lending is the largest when it comes to number of customers. Small people like vendors fall prey to those usurers who charge 20% interest per month. And the come on is the small installment. Example, if you take out a loan of 500 pesos, you are going to pay 20 pesos every day. That 20 is very small compared to the principal amount of 500. And if you add the total, you will be surprised that you have to pay back 600 pesos in one month's time.
Micro lending seems a good idea, especially if the interest rates are high. Many people - including me - do fear the access to credit due to the high interest rates even when we are discussing small amounts, so this has to be a good idea.
@Sunflogun, micro lending is giving advantage to the lender. But how about the borrowers? Most borrowers of micro lending are the so called small people who are in need of immediate cash whether for business or personal purposes. Like those who needed money for the hospital, how could they pay back when the interest is so high? Micro lending is not encouraged here but the government, particularly the finance department, couldn't do anything since they know that micro lending is helping the economy in its own way.
We call them "payday loans" here in the UK and they are notorious for charging an excessive rate of interest. A tip for UK residents, you don't have to be in receipt of benefits to be able to apply for a crisis loan from the local council. Applications are approved according to need, not income so this could be a viable, interest free option for a small loan which is required urgently.
This is the first time I've heard of such requirement - according to need. Over here, it is always capacity to pay as the first requirement of a borrower and next is the willingness to pay (which is hard to establish). It would be a great help to the masses if that type of loan would be available here for the benefit of emergency cases. Small loans are hard to find because most of the borrowers don't pay on time and some others don't pay at all.
I did look at these small peer to peer loans as an investment opportunity. However the high risk of defaults put me off, even properly balanced portfolios simply get so many defaults that it takes away a huge percentage of what you are making on the interest rate.
Some investment firms have crafted products that insure you, the investor, are protected form defaults. I personally don't invest because I think charging high rates to people who are difficult financial situations is unfair, but if was more ruthless I'd probably get into it. The rewards can be very high.
We have some of those schemes here in the UNited States. Payday loan operatives are some of these types of lenders. Some lenders are not as draconian as payday loans but they still charge a huge mark up on a loan. Anyone who is thinking of using the services of a micro lender better read the fine print carefully when it comes to getting some type of loan. They can be very unorthodox. It is often better to go with a known lender like a bank or credit union or even an online lender that has a good reputatiion.
I have never tried lending from these micro-lenders but my husband had some sort of encounter with them. He owns a small retail store and one day the salesladies called him telling him that somebody was looking for him. When he went to the store to see who the person was, the person introduced himself as a micro-lender. He offered his services and told my husband that he could lend him money or offer him goods that could be paid in small amounts on a daily or weekly basis. Since it wasn't my husband's nature to borrow from these kinds of money-lenders, he just listened to the offer and told the guy he would just call him if he would need to borrow. For some, micro-lending has been of great help especially the people who needed money right away but for some it could be a great burden since it's hard to find money to pay the debt. I guess if one knows that he/she has the ability to pay his/her debt then it would be alright to borrow from these micro-lenders. They do have a huge interest rate but paying the debt on small amounts could be okay for some who cannot pay on large amounts with lower interests.
It sounds quite similar to borrowing larger loans from institutions such as banks, where the borrowers may end up repaying way more than they borrowed. However, the interest rate you mentioned sounds very enormous. So, the lender has a huge advantage while the borrower is at an enormous disadvantage especially if there's no way to repay the loan quickly. I think the lender could have a little more discretion, and then it could be more beneficial.
