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Why do lenders ask for collateral while lending?
Why Lenders Ask for Collateral: 1. Security for the Lender: Collateral is like a safety deposit. It gives the lender something valuable as a backup in case the borrower can't repay the loan. 2. Risk Reduction: It helps lower the risk for the lender. If the borrower can't pay back, the lender can takRead more
Why Lenders Ask for Collateral:
1. Security for the Lender: Collateral is like a safety deposit. It gives the lender something valuable as a backup in case the borrower can’t repay the loan.
2. Risk Reduction: It helps lower the risk for the lender. If the borrower can’t pay back, the lender can take the collateral to cover the loan amount.
3. Better Loan Terms: Offering collateral often means getting a lower interest rate or being able to borrow more money. It gives borrowers access to better loan terms.
4. Approval Assurance: For people with little credit history or lower credit scores, collateral can increase the chance of loan approval. Lenders feel more secure lending money when collateral is provided.
5. Following Rules: Sometimes, rules or laws require lenders to take collateral to make sure they’re lending responsibly and managing risks.
Collateral makes lenders more confident in giving loans by lowering their risk. It’s like a guarantee that helps people borrow money or get better loan deals.
See lessCan you think of some examples of goods / services being exchanged or wages being paid through barter?
1. Goods Barter: - Example 1: Trading apples for oranges with a friend. You give them some apples, and they give you an equal value of oranges without using money. - Example 2: Swapping video games with classmates. You exchange one game for another without involving money. 2. Service Barter: - ExampRead more
1. Goods Barter:
– Example 1: Trading apples for oranges with a friend. You give them some apples, and they give you an equal value of oranges without using money.
– Example 2: Swapping video games with classmates. You exchange one game for another without involving money.
2. Service Barter:
– Example 1: Babysitting in exchange for dog-walking. You offer to babysit your neighbor’s child, and in return, they walk your dog on certain days.
– Example 2: Tutoring in exchange for gardening help. You help someone with their studies, and they help you with gardening chores.
3. Wages in Barter-like Systems:
– Example 1: Instead of receiving money, workers might get tokens or vouchers from their employers that they can use to buy goods at specific stores owned by the company.
– Example 2: In some situations, during economic crises, people might exchange goods or services directly with each other instead of using the devalued local currency for transactions.
These examples illustrate how goods, services, or even wages have been historically and presently exchanged without using traditional money, showcasing the concept of barter.
See lessHow does the use of money make it easier to exchange things?
How Money Simplifies Exchange: 1. Standard Value: Money has a fixed value recognized by everyone, unlike barter where items' values vary. This makes transactions easier as the value is agreed upon. 2. Eases Transactions: With money, you don't need to find someone who wants exactly what you have andRead more
How Money Simplifies Exchange:
1. Standard Value: Money has a fixed value recognized by everyone, unlike barter where items’ values vary. This makes transactions easier as the value is agreed upon.
2. Eases Transactions: With money, you don’t need to find someone who wants exactly what you have and has what you want. You can sell your item for money and use that money to buy what you need from anyone.
3. Portability and Divisibility: Money is easy to carry and can be divided into smaller units. This makes it handy for transactions of various amounts.
4. Widely Accepted: Almost everyone accepts money, allowing transactions with many people beyond just those in your community.
5. Maintains Value: Money doesn’t spoil or lose value quickly like some goods. You can save it and use it later, making it a reliable way to hold wealth.
6. Simple Economic Decisions: Money helps in comparing costs and making decisions because it provides a common measure of value.
Money’s simplicity and universal acceptance make trading easier, promoting smoother transactions and simplifying economic decisions for individuals and businesses.
See lessWhat are the differences between formal and informal sources of credit?
Formal Sources of Credit: 1. Institutionalized: Banks, registered lenders, and government-backed institutions. 2. Regulation: Operate under strict rules, supervised by authorities. 3. Documentation: Require paperwork like IDs, income proof, contracts. 4. Interest Rates: Usually lower, following markRead more
Formal Sources of Credit:
1. Institutionalized: Banks, registered lenders, and government-backed institutions.
2. Regulation: Operate under strict rules, supervised by authorities.
3. Documentation: Require paperwork like IDs, income proof, contracts.
4. Interest Rates: Usually lower, following market rates.
5. Accessibility: Mostly in cities, strict criteria might limit access for some.
Informal Sources of Credit:
1. Non-institutionalized: Moneylenders, friends, family, not under official control.
2. Lack of Regulation: Operate without strict legal guidelines.
3. Documentation: Often based on trust, might lack formal agreements.
4. Interest Rates and Terms: Rates can be high, terms vary widely.
5. Accessibility: More accessible in rural areas but might trap borrowers in cycles of debt due to higher rates.
Understanding these differences helps evaluate the advantages and disadvantages of using formal or informal sources of credit.
See lessGiven that a large number of people in our country are poor, does it in any way affect their capacity to borrow?
How Poverty Affects Borrowing Capacity: 1. Irregular Income: Poorer individuals often have unstable or low incomes, making it difficult to meet formal lenders' income criteria for borrowing. 2. Lack of Assets: They may not possess valuable assets to use as collateral for loans, a requirement by formRead more
How Poverty Affects Borrowing Capacity:
1. Irregular Income: Poorer individuals often have unstable or low incomes, making it difficult to meet formal lenders’ income criteria for borrowing.
2. Lack of Assets: They may not possess valuable assets to use as collateral for loans, a requirement by formal lenders, limiting their borrowing capacity.
3. Documentation Challenges: Limited access to formal documentation like stable income proofs or credit records reduces eligibility for loans from regulated lenders.
4. Limited Access to Formal Credit: Geographical isolation, lack of awareness, or discrimination restricts access to formal financial services, reducing borrowing opportunities.
5. Reliance on Expensive Informal Credit: Due to restricted access to formal credit, they might turn to informal sources like moneylenders, facing higher interest rates and debt traps.
Understanding these challenges helps recognize the barriers faced by poorer individuals in accessing fair and affordable credit.
See lessWhy do you think that the share of formal sector credit is higher for the richer households compared to the poorer households?
Certainly, here are the key points explaining the higher share of formal sector credit for richer households over poorer households: - Higher Income Stability: Richer households boast higher and more stable incomes, meeting formal credit criteria and demonstrating better repayment capability. - AsseRead more
Certainly, here are the key points explaining the higher share of formal sector credit for richer households over poorer households:
– Higher Income Stability: Richer households boast higher and more stable incomes, meeting formal credit criteria and demonstrating better repayment capability.
See less– Asset Ownership as Collateral: Wealthier households possess valuable assets, serving as collateral for loans, easing their access to formal credit.
– Superior Financial Literacy: Affluent households often possess better financial knowledge, understanding formal financial systems, and navigating banking procedures effectively.
– Proximity to Banking Services: Residing in areas with better access to banks facilitates easier entry into formal credit systems.
– Regulatory Alignment: Formal lending requirements inadvertently align with the financial circumstances of wealthier households, excluding poorer ones due to income, asset, knowledge, and geographic disparities.
Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan activities of informal lenders? Why would its task be quite difficult?
Reasons for Difficulty: 1. Regulatory Challenges: Informal lenders operate outside formal rules, making oversight complex. 2. Lack of Records: Transactions often lack documentation, making monitoring tough. 3. Diverse Practices: Varied lending methods across regions hinder standardized regulations.Read more
Reasons for Difficulty:
1. Regulatory Challenges: Informal lenders operate outside formal rules, making oversight complex.
2. Lack of Records: Transactions often lack documentation, making monitoring tough.
3. Diverse Practices: Varied lending methods across regions hinder standardized regulations.
4. Social Dynamics: Informal lending relies on trust and community ties, resistant to external oversight.
5. Geographical Reach: Informal lenders serve remote areas, making monitoring logistics challenging.
6. Resource Constraints: It demands substantial manpower and technology, often not readily available.
7. Balancing Act: Supervision must balance consumer protection with supporting financial inclusion efforts.
While supervising informal lending could protect consumers, complexities in its diverse, unstructured nature pose challenges for effective oversight.
See lessSuppose records show that the average income in a country has been increasing over a period of time. From this, can we conclude that all sections of the economy have become better? Illustrate your answer with an example.
An increase in a country's average income over time doesn't guarantee improvement across all sections of the economy. For instance, imagine a country where the average income rises due to significant salary increments in technology-related jobs. However, jobs in agriculture or small-scale industriesRead more
An increase in a country’s average income over time doesn’t guarantee improvement across all sections of the economy. For instance, imagine a country where the average income rises due to significant salary increments in technology-related jobs.
See lessHowever, jobs in agriculture or small-scale industries might not experience similar growth. This means that while some sectors or professions witness better incomes, others might remain unchanged or grow at a slower rate. Therefore, although the average income increases, it doesn’t ensure that all segments of the economy have improved equally.
Besides size of per capita income, what other property of income is important in comparing two or more societies?
Here are the key points about the importance of income distribution when comparing societies: 1. Equality vs. Inequality: Income distribution reflects how evenly or unevenly income is shared among individuals or households within a society. 2. Impact on Social Cohesion: A more equal distribution ofRead more
Here are the key points about the importance of income distribution when comparing societies:
1. Equality vs. Inequality: Income distribution reflects how evenly or unevenly income is shared among individuals or households within a society.
2. Impact on Social Cohesion: A more equal distribution of income often leads to greater social cohesion and harmony, fostering a sense of inclusivity and reducing social tensions.
3. Economic Stability: Fair income distribution can contribute to economic stability by reducing disparities that might lead to social unrest or economic imbalances.
4. Access to Opportunities: Unequal income distribution can limit access to opportunities such as education, healthcare, and economic advancement for lower-income groups.
5. Poverty and Social Issues: A more unequal distribution of income can exacerbate poverty levels and contribute to various social issues, including crime rates and health disparities.
6. Economic Growth: Excessive income inequality can hinder overall economic growth by limiting the purchasing power of a large section of the population.
7. Policy Implications: Governments may need to implement policies aimed at redistributing wealth or providing support to lower-income groups to address income inequality.
Understanding and addressing income distribution is essential for creating more balanced and inclusive societies, ensuring that wealth and opportunities are accessible to a larger portion of the population.
See lessWhy do you think average income is an important criterion for development? Explain.
Here are the key points explaining why average income is an important criterion for development: 1. Indicator of Living Standards: Average income indicates the average earnings per person in a country, providing insight into the standard of living. 2. Economic Growth: A rise in average income reflecRead more
Here are the key points explaining why average income is an important criterion for development:
1. Indicator of Living Standards: Average income indicates the average earnings per person in a country, providing insight into the standard of living.
2. Economic Growth: A rise in average income reflects economic growth, suggesting increased production and more wealth creation within the nation.
3. Human Development: Higher average income allows for investments in education, healthcare, and infrastructure, improving overall human development indices.
4. Poverty Reduction: Increased average income levels contribute to poverty alleviation by enabling access to essential goods and services.
5. Market Dynamics: Higher average incomes boost consumer spending, stimulating economic activity, and encouraging investments.
6. Global Competitiveness: Nations with higher average incomes are often more competitive globally, attracting investments and skilled labor.
Understanding average income helps assess a country’s economic progress and the well-being of its citizens, serving as a vital factor in measuring development and prosperity.
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