. What are informal sources of credit. What are its features
Informal sources of credit are those sources which are not registered under the government. There is no organization which supervises the credit activities of lenders in the informal sector.
Features of informal sources of credit are :
- They can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back. Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans.
- Thus, the cost of the borrower of informal loans is much higher. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves
- In certain cases, the high interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt trap