Two Different Credit Situations

  • Credit (loans) refers to an agreement between lender and borrower , in which the lender supplies money , goods or services to the borrower in return for the promise of future payment .
  • Credits (loans) sometimes can be, positive or negative , sometimes credit helps a person to increase earnings but sometimes if the borrower is unable to repay the loan , it can push the person into a debt trap .
  • A debt trap is a situation where the borrower had to take another loan to pay off his previous loans . Hence making a spiral of loans where the borrower takes loans to pay off his previous loans pushing him into a debt trap .

Positive:

  • As a positive role, the credit increases the earnings of the borrower if used carefully.
  • For example,
    • Salim, a shoe manufacturer, received an advance order of 3000 pairs of shoes from a large trader to be delivered in a month. To complete the production, Salim has to hire a few more workers for stitching and pasting and he has to purchase raw materials too. To cover all these expenses, Salim obtains two loans
    • First, he asked his leather supplier to supply leather now and promises to pay him later.
    • Second, he asked the large trader for an advance payment of 1000 pairs of shoes in cash.
    • At the end of the month, Salim was able to deliver the shoes and made a good profit and was able to pay back his loan.
    • Here credit helps Salim to meet the production expenses and he was able to complete the production on time and thereby increase his earnings .
    • Therefore, credit played a positive role for Salim and helped him in increasing his earnings .
  • That is not always the case, sometimes credit plays a negative role too.

Negative:

  • Credit if not used carefully and properly can push the borrower into a debt trap from where the recovery can be very painful .
  • For example,
    • Swapna, a farmer, grows groundnut on her 3 acres of land. She borrowed money at the beginning of the harvest season from the moneylender hoping that her harvest would pay off her debt but her crops failed midway through the season.
    • Swapna is unable to repay the loan, due to crop failure and over the years her debt grows into a large amount.
    • Next year she took another loan for cultivation and it was normal crops this year. But her earnings were not enough to pay her old loans.
    • So she had to sell a part of her land to pay off her debt.
    • Her credit , instead of increasing her income left her worse off .
    • Credit in this example pushes Swapna into a situation called a debt trap , from which the recovery is very painful .
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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.