Mr. “X” borrowed money from a money lender at a high rate of interest, as he could not pay the interest. Mr. “X” was forced to borrow from another landlord to settle the amount for the interest borrowed, to the money lender. State the consequences he may face in this situation.


Answer by Student

The consequences that Mr “X” may face in this situation are:

  • Debt trap : One of the major consequences of informal credit is that it can lead to a debt trap. Mr “X” may fall into a debt trap, which means that he may get caught in a vicious cycle of borrowing more and more money to repay his previous loans and interest. He may end up paying more than what he borrowed and lose his income and assets.

  • Exploitation : Mr “X” may face exploitation by the money lender and the landlord, who may charge him exorbitant rates of interest and impose harsh conditions on him. They may also harass him or threaten him with violence if he fails to repay them on time.

  • Poverty : Mr “X” may become poorer and poorer as he spends most of his income on repaying his loans and interest . He may not have enough money to meet his basic needs or invest in his farm or business. He may also lose his land or property if he defaults on his loans. He may also lose his land or property if he defaults on his loans or mortgages them to his creditors.

  • Social problems : Mr “X” may face social problems such as stress, depression, shame, and loss of dignity due to his indebtedness . He may also lose his social status and respect in his community. He may also face discrimination or ostracism by his creditors or other people.

  • Legal problems : Mr “X” may face legal problems if he fails to repay his loans or violates the terms and conditions of his contracts. He may be sued by his creditors or taken to court for defaulting on his debts. He may also face penalties or punishments such as fines, imprisonment or confiscation of his assets.

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Davneet Singh

Davneet Singh has done his B.Tech from Indian Institute of Technology, Kanpur. He has been teaching from the past 14 years. He provides courses for Maths, Science, Social Science, Physics, Chemistry, Computer Science at Teachoo.