Question

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

Answer 1

In situations with high risks, credit might create further problems for the borrower. This is also known as a debt-trap. Taking credit involves an interest rate on the loan and if this is not paid back, then the borrower is forced to give up his collateral or asset used as the guarantee, to the lender. Thus, in situations with high risks, if the risks affect a borrower badly, then he ends up losing more than he would have without the loan.