Difference Between Formal and Informal Sources of Credit

Overview of Credit

Credit is a term used to describe the ability to borrow money from an individual or institution. It can be used to finance purchases, investments, or other activities. Credit is typically obtained from either a formal or informal source. Both of these sources of credit can be beneficial, but it is important to understand the differences between them.

Formal Sources of Credit

Formal sources of credit are typically banks, credit unions, or other financial institutions. These sources of credit have established procedures and regulations in place in order to provide credit to borrowers. They typically require a credit check, a proof of income, and other requirements in order to provide credit. Formal sources of credit typically provide more secure loans with lower interest rates.

Informal Sources of Credit

Informal sources of credit are less structured than formal sources. These sources include friends, family, or even business acquaintances. Informal sources of credit are typically used when a borrower does not meet the requirements of a formal source of credit. These sources of credit can be beneficial since they usually have more flexible terms and conditions. However, they can also be risky as they are not as secure and typically have higher interest rates.

Conclusion

When looking for credit, it is important to understand the differences between formal and informal sources. Formal sources of credit typically have more secure loans with lower interest rates. On the other hand, informal sources of credit can be beneficial since they usually have more flexible terms and conditions. However, they can also be risky as they are not as secure and typically have higher interest rates.