Soft Loans – What they are and How they Work?

Soft loans offer loans with little or no interest compared to the usual loan. Where we must pay a certain amount of interest which is quite inconvenient to the borrower. A soft loan is a type of loan that is the most favorable to borrowers. However, in soft loans borrowers enjoy benefits like extended time for repayment or relief of paying any interest on the loan.

Soft Loans - What they are and How they Work ?

Soft loans are mostly offered to countries in need of development in their economic and financial sector. Thus, we shall be providing more on the types, benefits, and other important things to note about a soft loan.

Also, if you want to know who provides the soft loan? Well, they are provided by multilateral development banks. Agreements between two governments or nations also provide them.

What are Soft Loans?

Soft loans can also be called soft financing. A soft loan is a type of loan whereby there is very little or no interest in the loan agreement. Also, the borrower can get an extended time to repay the loan. In addition, we can also say that a soft loan is flexible and has the borrower’s interest. Multilateral development banks usually provide this type of loan. Whereby the soft loan is offered to developing countries to help them improve their economy.

Types of Soft Loans?

A soft loan can be categorized into two types. Thus we shall take a look at the 2 types of soft loans below;

  • Bilateral Soft Loan; A bilateral soft loan consists of 2 countries entering into a loan agreement whereby the borrower. Whereby the borrower is given the liberty to repay over a longer period than the traditional loan agreements we know. Also, the lender often excludes the interest or requires very minimum interest. This type of loan is usually done between two countries to strengthen their relationship ties.
  • Multilateral Development Banks; This is another type of soft loan where multilateral development banks like the “World Bank”. Provide soft for developing countries needing loans to support and maintain their economy.  

Benefits of Soft Loans

  • Interest Rate; One of the main benefits of soft loans is the removal of interest. Or just a little interest fee in the loan collected. This benefit is favorable to the borrowers. Where unlike conventional loans where a certain percentage of interest must be paid for on the loan.
  • Extended Grace Period and Longer Repayment Schedule; On soft loans, the borrowers are given the grace of extended period of repayments. Also, the borrowers get to enjoy a longer repayment schedule. This means that the lenders allow for a longer time for the borrower to complete their repayments of the loan.
  • Promotes Economic Growth; One of the reasons behind the soft loan agreement is mainly to help the economic growth of developing countries in need of loans.
  • Diplomacy; Most lenders like to enter into a soft loan agreement to strengthen relationships between one another. This is one of the means for both nations to strengthen their relations. By giving out loans and thereby receiving or having access to resources from the other nation.

The above are some of the benefits to enjoy from entering into a soft loan agreement.


To sum it all up, soft loans serve as a tool to help developing countries improve their economic growth. Which also results in a mutual relationship whereby both nations can benefit from one another. Thus, if a government is looking forward to taking a loan to help its economic growth. Then a soft loan is the most suitable type of loan.