What is a Soft Loan?

A soft loan is a loan that features a below-market interest rate or no interest at all. These loans are also known for having unusually favorable terms, such as extended repayment periods and interest holidays. Soft loans are most commonly offered by governments or multinational development banks in order to spur development, or are extended to government entities that would otherwise not be able to afford the terms of normal loans. In the latter case, soft loans are intended to be a form of economic aid.

Advantages of Soft Loans

The chief advantage of a soft loan resides on the receiving side of the arrangement, where the recipient obtains funds at favorable terms. The loan can be the driving force behind local development projects that would otherwise never occur.