DEFINITION of 'Soft Loan'
A loan with no interest or a below-market rate of interest, or loans made by multinational development banks (such as the Asian Development fund), affiliates of the World Bank and government agencies to developing countries that would be unable to borrow at the market rate. Soft loans are loans that have lenient terms, such as extended grace periods in which only interest or service charges are due, and interest holidays. Soft loans typically offer longer amortization schedules (in some cases up to 50 years) and lower interest rates than conventional bank loans.
Also knows as "soft financing" or "concessional funding."
BREAKING DOWN 'Soft Loan'
For example, Ethiopia received a soft loan from the Chinese government, in September 2012. The Chinese government announced a grant and soft loan package totaling US$23 million to support Ethiopian development activities. The loan is part of China's plan to support Ethiopia and to promote the development of trade between Ethiopia and China. In another example, the Chinese government extended a $2 billion soft loan to Angola in March 2004. The loan was made in exchange for its commitment to provide a continuous supply of crude oil to China.