Why are formal sources of credit preferred over informal sources? Choose the MOSTappropriate reason.1a. high interest rates for borrowingb. low cost of borrowingc. debt trapd. no organisation supervises the credit activities of lenders
Question
Why are formal sources of credit preferred over informal sources? Choose the MOSTappropriate reason.1a. high interest rates for borrowingb. low cost of borrowingc. debt trapd. no organisation supervises the credit activities of lenders
Solution
Formal sources of credit are generally preferred over informal sources due to the low cost of borrowing. Formal sources such as banks and other financial institutions are regulated by the government, which often results in lower interest rates. On the other hand, informal sources like money lenders or friends and family can charge high interest rates, leading to a potential debt trap. Furthermore, formal sources are supervised by an organization, ensuring the protection of the borrower's rights. Therefore, the most appropriate reason is the low cost of borrowing.
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