Which of the following is a disadvantage of using informal sources of credit in India?
They charge a very low rate of interest
They provide social security benefits to the borrowers
They exploit the borrowers and trap them in debt
They are easily accessible and available
Answer by Student
So, the correct answer is (C): They exploit the borrowers and trap them in debt
Detailed Explanation by Teachoo
Let’s check all the options
Option (A) They charge a very low rate of interest
- Informal sources of credit such as moneylenders, traders, relatives, etc. usually charge a very high rate of interest, sometimes as high as 5% per month or 60% per year. This makes it very difficult for the borrowers to repay the loan and increases their debt burden. This is
Option (B) They provide social security benefits to the borrowers
-. Informal sources of credit do not provide any social security benefits to the borrowers, such as insurance, pension, health care, etc. They only lend money for a short period of time and expect quick repayment with interest. They do not care about the welfare or well-being of the borrowers. This is also
- Option (C) They exploit the borrowers and trap them in debt - Informal sources of credit often exploit the borrowers and trap them in debt by charging exorbitant interest rates, using unfair means of recovery, forcing them to sell their assets or crops at low prices, etc. Many poor and illiterate borrowers fall prey to these informal lenders and end up in a vicious cycle of debt and poverty. This is correct .
- Option (D) They do not maintain any records or documents - Informal sources of credit do not maintain any records or documents of the loans they give or receive. This makes it difficult to track or verify the transactions and increases the chances of fraud, dispute, or default. This is also incorrect
Thus, option (C) is correct