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 tend to be mainly of two types:
- Low interest rates: Soft loans can generate very low interest rates, lower than market interest rates (that is, of the rest of the rest of the loans). This is a favorable condition since the cost for the borrower is lower than in other types of loans.
- Long repayment terms: The repayment terms for soft loans may be longer than for other loans on the market. In this way, the borrower has more time to repay the credit, which translates into an advantage for the borrower.
Soft credits can have the two previous conditions or one of them. They could even have other advantages, although the most common are the above.
Characteristics of soft loans
The main characteristics of soft loans are the following:
- The most important characteristic is its favorable conditions, which are usually related to low interest rates or long repayment terms.
- The lender is usually a public financial institution, since soft loans are not primarily intended to obtain profitability. For this reason, private financial entities 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 hidden subsidies.
Otherwise, soft loans have the same formal characteristics as other loans.
Purpose of soft loans
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 tends to have a social character, to favor certain agents. There are many examples of this: soft loans for companies (conditional on making a series of investments), soft loans for people with certain financial difficulties, etc. Therefore, soft loans usually come from government funds, granted directly by public financial entities or indirectly through private financial entities.