Question

What are the two categories of sources of credit? Mention four features of each?

Answer 1

Answer:

The two categories of sources of credit are formal and informal sources.

Explanation:

The formal source of credit as the name implies is an official means of obtaining loans. Its features include,

1. It is administered by corporate institutions like banks and other lending bodies.

2. It is regulated by a body in the relevant country.

3. There are recognized and standard interest rates that must be paid by the borrower.

4.  It is guided by laws which both parties are expected to keep.

The Informal sources of credit are unofficial means of borrowing funds There features include,

1. They can be obtained from friends, relatives, and acquaintances.

2. There are no standard interest rates as these are determined by the lenders.

3. There are no official bodies to regulate the lending process.

4. They are mostly used by poor businessmen and women who need small loans.