Describe the bad effects of informal sources of credit on borrowers.



Points to Remember:

  • Informal source of credit charge very high-interest rates
  • Due to high-interest rates the cost of borrowing is high too.
  • The lenders in the informal source of credit sometimes exploit their borrowers for the repayment of loans.
  • This could lead to an increase in debt and a debt trap.

Answer to be written:

  • Most of the lenders in the informal sector of loans charge very high-interest rates because unlike the formal sector there is no organisation that monitors or regulate the informal sector.
  • Due to the high rate of interest the cost of borrowing increases too. The high cost of borrowing means that the amount to be repaid is sometimes greater than the income of the borrower.
  • In the informal sector of credit many lenders tend to exploit their borrowers . There is no one to stop informal lenders from using unfair means to get their money back .
  • The high cost of borrowing sometimes throws the borrower into a debt trap from where the re-payment is very painful .

(Any three points)

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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.