Choose the given statement as true/false:

There are disadvantages to informal sources of credit.

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Detailed Solution

The above statement is true.
The unregulated financial system allows lenders to set their own interest rates. No authority has any control over the lending practices of the informal sector. The cost of taking credit from informal sources is significantly high since the interest rate on loans in the informal sector is higher than in the official sector. Due to the increased cost of borrowing, a larger portion of the borrowers' income goes to the repayment of the loan. Other times, higher interest rates make it so that the borrower's required repayment is greater than his income, which causes debt to grow and traps the borrower in a debt trap.

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