Class 10 Exam > Class 10 Videos > Social Studies (SST) Class 10 > Formal & Informal Sectors of Credit
Formal & Informal Sectors of Credit Video Lecture | Social Studies (SST) Class 10
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FAQs on Formal & Informal Sectors of Credit Video Lecture - Social Studies (SST) Class 10
| 1. What are the main differences between formal and informal sectors of credit? |  |
Ans. The formal sector of credit includes recognized financial institutions like banks and credit unions that follow government regulations and provide loans with official documentation. In contrast, the informal sector consists of unregulated lenders, such as loan sharks or local moneylenders, who may charge higher interest rates and operate without legal oversight.
| 2. Why do people prefer informal credit over formal credit? | |
Ans. People may prefer informal credit due to easier access and fewer requirements, such as not needing a credit history or collateral. Informal lenders may also provide quicker loans without the lengthy processes often associated with formal institutions, making it appealing for urgent financial needs.
| 3. What are the risks associated with borrowing from the informal sector? | |
Ans. Borrowing from the informal sector can be risky due to high-interest rates, the potential for exploitation, and the lack of legal protection. Borrowers may face threats or harassment if they cannot repay the loans on time, leading to a cycle of debt that is difficult to escape.
| 4. How does the formal credit sector contribute to the economy? | |
Ans. The formal credit sector contributes to the economy by providing loans for businesses and consumers, which stimulates economic growth. It helps individuals invest in education, homes, or businesses, thus increasing productivity and creating job opportunities, while also ensuring that funds are used in a regulated manner.
| 5. What role do credit scores play in accessing formal credit? | |
Ans. Credit scores are crucial in the formal credit sector as they indicate a borrower's creditworthiness. A higher credit score suggests a reliable borrower, making it easier to obtain loans with favorable terms. Conversely, a low credit score may result in higher interest rates or denial of credit altogether.
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Dec 24, 2024 Last updated |
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