Formal and Informal Sources of Credit

What are formal sources of credit?

Though formal kinds of credit are legal institutions or channels that can provide people and businesses with loans and credit facilities, their sources are legal institutions or channels through which people and businesses can borrow money or obtain credit facilities, for example, banks, credit unions, microlending organizations, and government programs.

Which source of credit is more accessible?

The advantage of informal sources of information is that they are obtainable, while formal sources guarantee transparency and stability.

What are informal sources of credit?

Microfinance is the alternative source of funds which is not provided by the formal banking system, such as to borrow from friend, relative, or moneylender.

What is the risk of financing from informal types of creditors?

The regulation is one of the key reasons why formal sources are considered safe, whereas informal sources could easily be subject to exploitation and high interest rates, and they simply may disclose any relevant details.

How can I choose between formal and informal sources of credit?

Guiding lines in choosing the source of credit include interest rates, ease of access, and transparency. Remember to conduct a risk assessment and see which one you pick.

Difference between Formal and Informal Sources of Credit

Sources of credit are classified as “Formal Sources of Credit” and “Informal Sources of Credit”. Formal sources of credit are characterized by their regulated structure, standardized practices, legal protections, and accessibility to a wide range of borrowers. In contrast, informal sources of credit operate outside formal regulatory frameworks, relying on trust-based relationships, flexible terms, and community-based practices to provide access to finance for underserved populations.