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

Posted by Chimi Ghising 2 years, 10 months ago

CBSE > Class 10 > Social Science

1 answers

Preeti Dabral 2 years, 10 months ago

In situations with high risks, credit might create further problems for the borrower. This is also known as a debt-trap. Taking credit involves an interest rate on the loan and if this is not paid back, then the borrower is forced to give up his collateral or asset used as the guarantee, to the lender. This statement is true if we take an example of a small farmer who has taken a loan to meet cultivation expenses. In case, the crop fails due to inadequate rain, pest attack or any other reason, he will not be able to repay the loan and may have to sell part of his land for repaying the loan. Thus, this situation is a high-risk situation, depending entirely on a good crop.

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CBSE > Class 10 > Social Science