What to Do If You Cannot Repay Microloans

Sometimes it is difficult to repay microloans due to challenging life circumstances, such as job loss. Here’s what to do in such situations.

Can You Cover One Loan With Another Loan or Credit?

It is not recommended to take out new microloans to pay off existing ones, as this can increase the total debt. Microloan interest rates are high and accrue daily, which creates a high risk of falling into even deeper debt, especially if the borrower already has many microloans, for example, more than ten.

Repaying microloans through a bank loan can be a more advantageous solution. Loan or credit card interest rates are still high, but they are lower than microfinance organization rates. When taking a bank loan or credit card to pay off microloans, it is crucial to use the funds to fully repay the debts. If you spend the money on personal needs and do not pay off all microloans, the remaining debts may become unpayable, and the total debt will increase due to daily interest and penalties for missed payments.

Before approving a loan or credit card, the bank evaluates the stability of income, debt load, credit history, and the borrower’s rating.

Why Microloan Debt Is Dangerous

Microloans are convenient when a small amount is urgently needed for a short period — for example, for medication, phone repair, or everyday expenses until the next paycheck. In such cases, the overpayment is small if the loan is repaid on time. Some microfinance organizations even issue loans to new clients at 0% annual interest.

The danger arises when taking multiple large microloans and failing to repay them on time. Microloan debts are problematic because interest accrues daily and penalties are applied in case of overdue payments. The higher the overdue amount, the harder it becomes to repay, especially if the borrower’s income is insufficient.

What Happens If You Don’t Pay Microloans

Typically, the microfinance organization starts taking measures in the first days of overdue payments: fines and penalties specified in the loan agreement are applied. In addition, interest continues to accrue on the debt, which accelerates its growth.

Staff from the microfinance organization will also call and send messages reminding the borrower of the debt, to secure repayment.

Dealing With Collectors

If the microfinance organization cannot recover the debt independently, it may transfer the debt to collectors. Their actions are limited by law. For example, collectors may call the borrower no more than twice per week and send messages no more than four times per week, and they must behave correctly during communications.

Options When You Cannot Repay

Prolongation of a Microloan

Prolongation allows extending the loan repayment term, for example, by one week. To extend, contact the microfinance organization’s support and clarify the terms and cost of this service.

Refinancing

Refinancing is taking a loan to repay other debts, such as microloans, loans, or credit cards. The funds must be used to pay off existing debts, and personal spending is generally not allowed. Money can only be spent on personal needs if the approved loan amount exceeds the current debt. After repaying all obligations, the remaining amount can be used for personal purposes or partial early repayment. Refinancing can combine multiple loans into one and reduce total overpayment.

Restructuring

Microloan debt can be restructured by contacting the microfinance organization’s support. Restructuring means changing loan terms for borrowers facing difficulties. The organization may make concessions, such as reducing the interest rate or extending the repayment term.