Facing an urgent need for money, microloans (or minicréditos) promise a quick fix, with almost instant approval and minimal paperwork. That convenience, however, usually comes at a very high cost that's worth understanding before applying for one.
What a microloan is
It's a small loan (usually a few hundred euros) with a very short term (weeks or a few months), granted by fast-credit lenders, generally without requiring the extensive documentation a conventional bank personal loan demands, with an almost instant decision, often within minutes.
Why the APR tends to be extremely high
Speed and the absence of a thorough solvency check come at a price: these lenders take on considerably more default risk than a traditional bank, and they offset it with very high interest rates, which when expressed as an annualized APR can reach figures several times higher than a conventional personal loan.
The real cost in a simplified example
A €300 microloan to be repaid in 30 days with a cost of, say, €45 in interest and fees, may seem manageable in absolute terms, but that figure, expressed as an annualized APR, can represent a disproportionately high annual percentage compared with any conventional financing.
The risk of repetition: taking out a new one to pay off the last
One of the biggest risks with this type of product is falling into a pattern of taking out a new microloan to repay the previous one when it comes due, creating a growing debt spiral where the total accumulated cost can far exceed the amount originally needed.
When it might make sense (with caveats) to use one
This type of product only makes sense for a one-off, small need, with total certainty of being able to repay it within the agreed term using resources you already expect (for example, income you already know you'll receive within a few days) — never as a regular liquidity solution or without a clear repayment plan.
Cheaper alternatives before resorting to a microloan
- A conventional personal loan, if the timeframe allows, with a much lower APR.
- A credit line or overdraft already arranged with your regular bank, if you have one.
- An emergency fund already set up for situations like this, if you have one.
Always compare the APR before deciding
Our personal loan calculator lets you calculate the real APR of a conventional financing alternative, to compare against the APR of any microloan you're considering before deciding.