Cost of borrowing
Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Class 10, Ch 3 "Money and Credit"
Meaning
The cost of borrowing is the interest and any other charges a borrower pays on a loan. When this cost is high, more of the borrower's income goes to repaying the loan, so they keep less for themselves. The amount due can even become larger than the borrower's income, so the debt keeps growing. A high cost also stops people from starting an enterprise at all. This is why Class 10 says: "Cheap and affordable credit is crucial for the country's development."
Example
Both farmers below borrow ₹10,000 for 4 months:
- Shyamal borrows from a trader at 3% a month and pays ₹1,200 in interest.
- Arun borrows from a bank at 8.5% a year and pays about ₹283 in interest.
Because Arun pays much less, he keeps far more of the earnings from the same crop.
Don't confuse with
- Collateral: an asset pledged as security for a loan. Collateral is one of the terms of credit, but it is not a cost the borrower pays.