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Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loan
Reason: The cost to the borrower of informal loans is much higher
Select the correct code:
- a)Both A and R are true and R is the correct explanation of A.
- b)Both A and R are true but R is not a correct explanation of A.
- c)A is true but R is false.
- d)A is false but R is true.
Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Assertion: Many borrowers find themselves in the Debt trap due to the...
- Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. Thus, the cost to the borrower of informal use 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 (as we saw for Shyamal in Sonpur). In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
- This could lead to increasing debt (as we saw for Rama in Sonpur) and debt trap. Also, people who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.
Most Upvoted Answer
Assertion: Many borrowers find themselves in the Debt trap due to the...
Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loan.
Reason: The cost to the borrower of informal loans is much higher.
The assertion states that many borrowers find themselves in a debt trap due to the informal source of loans, while the reason provided is that the cost to the borrower of informal loans is much higher.
Informal loans refer to borrowing from sources that are not regulated by formal financial institutions such as banks or credit unions. These sources can include moneylenders, friends, family members, or even loan sharks. These loans are typically characterized by high interest rates, lack of legal documentation, and absence of consumer protection measures.
Supporting Point 1: High interest rates:
- Informal loans often come with exorbitant interest rates that are significantly higher than those offered by formal financial institutions.
- This is because the lenders of informal loans usually operate outside the purview of regulatory authorities and can charge interest rates based on their own discretion.
- As a result, borrowers end up paying a substantial amount of money in the form of interest, which can make it difficult for them to repay the loan.
Supporting Point 2: Lack of legal documentation:
- Informal loans are often based on verbal agreements or informal written documents, lacking the legal protection and enforceability that formal loans provide.
- This makes it easier for lenders to exploit borrowers by changing the loan terms or demanding additional payments without any legal recourse for the borrower.
- As a result, borrowers may find themselves trapped in a cycle of debt due to the lack of transparency and legal safeguards.
Supporting Point 3: Absence of consumer protection measures:
- Informal loans are not subject to the same consumer protection measures that are mandated for formal loans.
- This means that borrowers do not have access to mechanisms such as credit counseling, debt restructuring, or dispute resolution, which can help alleviate their financial burden.
- Without these support systems, borrowers may struggle to manage their debt and find themselves trapped in a never-ending cycle of borrowing to repay existing loans.
Conclusion:
Given the high interest rates, lack of legal documentation, and absence of consumer protection measures associated with informal loans, it is evident that the cost to the borrower is much higher. This, in turn, leads many borrowers to find themselves in a debt trap. Therefore, both the assertion and the reason are true, with the reason providing a correct explanation for the assertion. Hence, option 'A' is the correct answer.
Reason: The cost to the borrower of informal loans is much higher.
Explanation:
The assertion states that many borrowers find themselves in a debt trap due to the informal source of loans, while the reason provided is that the cost to the borrower of informal loans is much higher.
Informal loans refer to borrowing from sources that are not regulated by formal financial institutions such as banks or credit unions. These sources can include moneylenders, friends, family members, or even loan sharks. These loans are typically characterized by high interest rates, lack of legal documentation, and absence of consumer protection measures.
Supporting Point 1: High interest rates:
- Informal loans often come with exorbitant interest rates that are significantly higher than those offered by formal financial institutions.
- This is because the lenders of informal loans usually operate outside the purview of regulatory authorities and can charge interest rates based on their own discretion.
- As a result, borrowers end up paying a substantial amount of money in the form of interest, which can make it difficult for them to repay the loan.
Supporting Point 2: Lack of legal documentation:
- Informal loans are often based on verbal agreements or informal written documents, lacking the legal protection and enforceability that formal loans provide.
- This makes it easier for lenders to exploit borrowers by changing the loan terms or demanding additional payments without any legal recourse for the borrower.
- As a result, borrowers may find themselves trapped in a cycle of debt due to the lack of transparency and legal safeguards.
Supporting Point 3: Absence of consumer protection measures:
- Informal loans are not subject to the same consumer protection measures that are mandated for formal loans.
- This means that borrowers do not have access to mechanisms such as credit counseling, debt restructuring, or dispute resolution, which can help alleviate their financial burden.
- Without these support systems, borrowers may struggle to manage their debt and find themselves trapped in a never-ending cycle of borrowing to repay existing loans.
Conclusion:
Given the high interest rates, lack of legal documentation, and absence of consumer protection measures associated with informal loans, it is evident that the cost to the borrower is much higher. This, in turn, leads many borrowers to find themselves in a debt trap. Therefore, both the assertion and the reason are true, with the reason providing a correct explanation for the assertion. Hence, option 'A' is the correct answer.
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Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer?
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Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer?.
Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer?.
Solutions for Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer? in English & in Hindi are available as part of our courses for UPSC.
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Here you can find the meaning of Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer? defined & explained in the simplest way possible. Besides giving the explanation of
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ample number of questions to practice Assertion: Many borrowers find themselves in the Debt trap due to the informal source of loanReason: The cost to the borrower of informal loans is much higherSelect the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer? tests, examples and also practice UPSC tests.
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