There is no organisation which supervises the credit activities of lenders in
the informal sector.
(ii) They can lend at whatever interest rate they choose.
(iii) There is no one to stop them from using unfair means
to get their money back.
(iv) Compared to the formal lenders, most of the informal
lenders charge a much higher interest rate on loans. So, the cost to the
borrowers of informal loans is much higher.
(v) Higher cost of borrowing means a larger part of the
earnings of the borrower is used to repay the loan.
(vi) The higher interest rate of borrowing can mean that
the amount to be repaid is greater than the income of the borrower. This could
lead to increasing debt and debt trap.
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