Ask a Teacher

 Farmers usually take crop loans at the beginning of the season and repay the loan after harvest. Repayment of the loan is crucially dependent on the income from farming.The failure of the crop made loan repayment impossible. The sell part of the land to repay the loan. Credit, instead of helping improve her earnings, left her worse off. Credit in this case pushes the borrower into a situation from which recovery is very painf. In one situation, because of the crop failure, credit pushes the person into a debt trap. To repay loan to sell a portion of land. It is clearly much worse off than before. Whether credit would

be useful or not, therefore, depends on the risks in the situation and whether there is some support,in case of loss. repayment of the principal. In addition, lenders may demand collateral (security) against loans. Collateral is an asset that the borrower owns (such as land, building, vehicle, live stocks,deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing.