What are the differences between formal and informal sources of credit?

Question: What are the differences between formal and informal sources of credit?

Formal sources of credit involve applying for loans, mortgages, lines of credit, and other forms of debt through financial institutions like banks and credit unions. These loans have a set list of requirements that must be fulfilled, and can be expensive due to fees and interest.

Informal sources of credit involve borrowing funds from friends and family, or other non-traditional resources like payday loans or peer-to-peer lending networks. These loans generally require little-to-no paperwork, but can come with high interest rates and can be less regulated than those from formal sources. Additionally, borrowing from informal sources can put the borrower in a financially vulnerable position if the loan is not paid back as agreed.

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