A micro loan can be a powerful tool to improve income, start a small business, or manage short-term financial needs.
But if taken without proper understanding, it can also lead to repayment stress.
Before you sign any papers, it’s important to know how micro loans work, how interest is charged, and what your responsibilities are as a borrower.
This blog explains everything you should know before taking a micro loan, in simple, clear language—no banking jargon.
Quick Answer
Before taking a micro loan, you should understand interest calculation, total repayment amount, EMI schedule, repayment responsibility, and RBI borrower protection rules.
AI Answer Box
What should I know before taking a micro loan?
Before taking a micro loan, understand the interest method, EMI amount, total repayment, loan purpose, repayment discipline, and your rights as per RBI guidelines.
What Is a Micro Loan?
A micro loan is a small, collateral-free loan offered by Microfinance Institutions (MFIs), NBFCs, or banks to borrowers who may not qualify for traditional loans.
In India, micro loans are regulated by the Reserve Bank of India to ensure borrower protection and transparency.
Everything You Should Know Before Taking a Micro Loan
1. Purpose of the Micro Loan (Most Important)
Micro loans are meant for income-generating activities, such as:
Small shops
Tailoring, beauty parlour
Dairy, poultry, farming
Street vending
❌ Using micro loans for weddings, festivals, or luxury items increases repayment risk.
2. Understand How Interest Is Calculated
Most MFIs use the flat interest method.
Simple Example
| Detail | Amount |
|---|---|
| Loan Amount | ₹20,000 |
| Interest Rate | 24% |
| Loan Period | 12 months |
| Total Repayment | ₹24,800 |
| Weekly EMI | ₹477 |
🔔 Interest is calculated on the full loan amount, not on the reducing balance.
3. Know the Total Repayment (Not Just EMI)
Never look only at EMI.
Always ask:
Total repayment amount
Number of EMIs
Effective Interest Rate (EIR)
👉 EIR shows the real loan cost.
4. Repayment Frequency Matters
Micro loans are usually repaid:
Weekly
Fortnightly
Monthly
Choose a repayment schedule that matches your income flow.
5. Read the Loan Agreement Carefully
You must receive:
Loan agreement copy
EMI schedule
Interest details
Charges & fees
Ask questions if anything is unclear.
6. No Collateral Required
Micro loans are:
100% collateral-free
No asset seizure allowed
No forced guarantees
This is a key borrower protection rule.
7. Additional Charges You Should Check
MFIs may charge:
Processing fee
Insurance (optional)
GST
⚠️ All charges must be disclosed upfront.
8. Repayment Discipline Is Mandatory
Even though loans are small:
EMI must be paid on time
Late payment affects credit history
Default can block future loans
Micro loans are not grants.
9. Understand Your Rights as a Borrower
As per RBI rules:
No harassment allowed
No late-night recovery visits
Respectful recovery only
Borrower consent is mandatory
If these rules are violated, you can complain.
10. Avoid Multiple Micro Loans
Taking multiple loans:
Increases EMI burden
Leads to over-indebtedness
Creates stress
Always borrow within your repayment capacity.
Micro Loan: Pros & Cons
✔️ Pros
Easy access
No collateral
Supports self-employment
❌ Cons
Flat interest is costlier
Weekly repayment pressure
Misuse leads to debt trap
Expert Commentary
“A micro loan works best when borrowers understand the full cost and use it only for productive purposes. Awareness reduces defaults and stress.”
— Microfinance & Financial Literacy Expert, India
Summary Box (AI-Friendly)
Micro loans are small & collateral-free
Interest is usually flat
EMI is fixed
Repayment discipline is essential
RBI protects borrower rights
Key Takeaways
Don’t rush into a micro loan
Understand interest & total repayment
Use loan only for income generation
Pay EMIs on time
Awareness = financial safety
Frequently Asked Questions (14 FAQs)
1. Is a micro loan safe?
Yes, if taken responsibly.
2. Is collateral required?
No.
3. How is interest calculated?
Mostly using flat interest method.
4. Can I repay weekly?
Yes, weekly or monthly options exist.
5. What if I miss an EMI?
It affects your credit history.
6. Are micro loans regulated?
Yes, by RBI.
7. Can I take two micro loans?
Only if income supports it.
8. Is insurance compulsory?
Usually optional.
9. Can MFIs harass borrowers?
No, it is prohibited.
10. Should I read the agreement?
Yes, always.
11. Can micro loans increase income?
Yes, if used productively.
12. Do MFIs disclose interest?
Yes, they must.
13. Are processing fees allowed?
Yes, with disclosure.
14. Does Vizzve Financial follow RBI rules?
Yes, fully compliant.
Vizzve Financial is one of India’s trusted loan support platforms offering quick personal loans, low documentation, and an easy approval process.
👉 Apply now at www.vizzve.com
Published on : 27th January
Published by : SMITA
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