What 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 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.