Hard & soft loan


A hard loan is a loan with very specific parameters and adheres to market conditions such as the interest rate. A hard loan is not as "flexible" as a soft loan which does not have as many stipulations.

Terms for a hard loan:[1]

  • The interest rate
  • The currency the repayment is made in
  • Maturity date (when the repayment is due)
  • The repayment schedule
  • The risk premium (determined by the credit rating of the debtor, the poorer the rating the higher the premium)

Soft Loan

A soft loan is a loan with relatively "loose" terms, it typically has an interest rate below the market rate (or sometime no interest at all), flexible maturities and is often used dy development banks.[2] Soft loans are usually given out by a government as a government can afford to be more flexible with their terms than a non-governmental institution that must earn a profit for their shareholders.[3]

A soft loan may be given to the government or development bank in a developing country by another nation or an organization such as the World bank. Because governments and organizations such as the World Bank do not need to make a profit they can afford to loan the money for a log time and with low interest. The debtor only needs to repay the principle amount. For some specific information on what the World Bank has done with soft loans, please see here.

For Further Reading

References

  1. J.Black, N. Hashimzade, and G. Myles. (2009) "Hard Loan" [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-1420?rskey=hY9dYh&result=1, 2009 [Aug 20, 2016]
  2. "A Dictionary of Economics", entry: soft loan, published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017].
  3. J. Law. "Soft Loan." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199664931.001.0001/acref-9780199664931-e-3543?rskey=RQmeg3&result=18, 2015 [Aug 21, 2016].