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Explain how credit plays a negative role with an example.
Answer:
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Points to Remember:
- Credit is an agreement between lender and borrower.
- It plays both positive and negative roles .
- A negative role can be that it pushes the borrower into a debt trap.
Answer to be written:
- 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 .
- 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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