Question

why are formal sources of credit preferred over the informal sources of credit

Answer 1

Formal Source of credit is type of credit which is taken from any authorized bank on a permanent interest of same value.

But,

In Informal Source of Credit the credit is taken from any unauthorized factors like moneylenders, landlords who do not provide you a permanent interest of same value. While The interest rates of credit are changeable.

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Answer 2

In formal sources there is high rate of interest.Due to which people cant pay back.And if they can't pay back then there property will be seized.It also requires some security assets which poor people don't have.So there they face lots of problems so they prefer informal sources like friends,relative,etc. It doesnt require any think it is based on mutual trust..