Manav must make this option after carefully weighing the benefits and drawbacks.
Pros of an Informal Lender
Manav may be acquainted with this unofficial lender.
Informal lenders make it easier to obtain loans.
When taking out loans from informal lenders, the collateral would not be necessary.
Cons of an Informal Lender
Informal lenders, on the other hand, tend to charge far greater interest rates than banks.
When the rate of interest is extremely high, Manav may find himself in a financial trap.
There are no organizations that keep track of the unofficial credit sources.
As a result, if the needed amount is not paid back on time, it is possible that Manav may be harassed by informal lenders.
Because the cost of borrowing from informal sources of credit is so high, Manav’s earnings will almost certainly be utilized to repay the debt.
In some situations, Manav may find himself in a scenario where the sum owed is larger than his income.
Pros of Banks
The interest rates charged will be lower than those offered by informal lenders.
Banks are regulated by the Reserve Bank of India since they are official suppliers of credit.
Cons of Banks
When compared to borrowing money from informal sources, it is extremely difficult for impoverished individuals to borrow from banks.
Documentation is required for bank loans.
Collateral (security) is required for bank loans.
Collateral is an asset that a borrower possesses and uses as a guarantee to a lender until the loan is returned, such as bank accounts, livestock, buildings, and automobiles.
The majority of the time, impoverished individuals do not have enough collateral to obtain bank loans.
Final Answer:
Mr. Manav will determine whether to take out a loan from a bank or a money lender based on the interest rates, terms and conditions, necessary papers, repayment method, and credit location.