Suppose in an economy, there is no organisation which supervises the credit activities of lenders in the informal sector. Write down any three problems that the borrowers will face in this economy if they will borrow money from the informal sources.
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Answer:
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Explanation:
In situations with high risks, credit might create further problems for the borrower. This is also known as a debt-trap. Taking credit involves a certain amount of loan that is taken by a borrower from a lender at a high-interest rate. If the borrower fails to pay back the loan amount due to some loss in his job or business, he further falls in the trap of credit. He has to repay the credit along with the interest applied by the lender. This increases the problems for the borrower. In such a situation, he is forced to give up his collateral or asset used as the guarantee, to the lender.
Explanation:
If there is no organisation which supervises the credit activities of lenders in the informal sector then the problems that the borrower will face in this economy if they will borrow money from the informal sources are as follows -
- Very High Rate Of interest.
- Lender may use very unfair means to get back the lended money amount with the given interest.
- income of the borrower due to above two points will be affected and there is always a high risk for borrowers to fall in debt-trap.
- Informal sectors make loans very expensive as they are no external organizations controlling the credit activities of lenders.