Question

In situations with high risks, credit might create further problems for
borrower. Explain

maximum 5 points
​

Answer 1

Answer:

In situation with high risk, credit might create further problems for borrower. this is also known as dept-trap. taking involves an interest rate on loan And if this is not paid back , then the borrower is forced to give up his collateral and asset used as the guarantee, to the lenders.

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Answer 2

Answer:

Money borrowed on higher rates of interest will usually increase the debt burden or debt trap.

Debt trap is a situation where the debtor will not be able to repay the debt incurred.

Informal sources of credit charge higher rates of interest.

For example : Small farmers taking loan from money lenders at higher rates of interest for farming purposes and not able to pay back will result in selling a portion of farmers' land and paying back to the money lender.