why is a loan from informal sector costlier than the formal sector? 1 mark
Answers
Loans are very important part of any economical sector.Because the financial investments are directly or indirectly dependent on these financial loans.
There are two types of loan giving sources,formal and informal.
Formal sources are government authorised which follow a limited rules and regulations about the loan interest.
But the informal or personal scale loan sources don't follow any rules and limitations about the loan interest.
That's why the informal loan sources are mostly costlier than the formal and authorised sources.
Answer:
Informal sector loans are unsecured loan that is given base on mutual trust, good will, and without mostly any collateral security. The risk of defaulting is more here hence the rate of interest is put higher.
Loan from formal sector is more organized and are based on the financial credibility of the person borrowing the loan. The amount of risk is minimum here, hence it is less costly than informal sector loan.
Explanation: