In situations with high risks, credit might create further problems for the borrower. Explain.

This statement is true “In situations with high risks, credit might create further problems for the borrower”. Sometimes the interest levied on the credit taken by the borrower forces him to borrow more funds and he falls into a debt-trap. If the interest is on loan is not paid back timely, then the borrower is forced to give up his collateral or asset used as the guarantee, to the lender. If a farmer takes a loan for crop production and the crop fails, loan payment becomes impossible. To repay the loan the farmer has no option but to sell a part of his land which makes his situation worse than before. Since farming is associated with high uncertainty, debt trap is common. Thus, the loan proves to be costlier to the borrower as he ends up losing his assets as well.

Source:

NCERT Solutions for Class 10 Economics Chapter 3

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