A loan is a type of debt.

Like all debt instruments, a loan

entails the redistribution of financial assets over time,
between the lender and the borrower.
In a loan, the borrower initially receives or borrows an
amount of money, called the principal, from the lender, and
is obligated to pay back or repay an equal amount of
money to the lender at a later time. Typically, the money is
paid back in regular installments, or partial repayments; in
an annuity, each installment is the same amount.
ARE CREDIT AND LOAN SAME ?
Debt and credit are two sides of the same coin. Debt is
something owed and credit is something given, usually in
the form of money. A person who receives credit is
the debtor or borrower, and the person who gives credit
is the creditor.
To receive credit, the debtor must enter into a contract
with the creditor specifying the terms by which the debt
will be repaid. This contract is often called a loan.

It helps in increasing economic activities of the
borrowers.
If credit is made available to the poor people on
reasonable terms and conditions, they can improve
their economic condition.
Credit may increase the activities in the secondary
sector i.e. , manufacturing sector.
With credit people could set up new industries or trade
in goods. Thus, it plays a crucial role in countrys
development.
NECESSITY OF CREDIT
CASE STUDY-1
AGRICULTURAL LOAN
Ram is an illiterate agricultural labourer in a village. Due to
seasonality of work, he is jobless and needs credit to meet
his daily expenses. Expenses on sudden illness or functions
in the family are also met through loans. He asks for credit
from a large trader. The trader agrees him to give the credit
of 5000 but the rate of interest is 6% per month! Ram
works very hard but it is very difficult for him to pay the loan
at such a high rate of interest. His family financial condition
has become bad to worse. It is likely, that he has to live his
whole life in debt.
CASE STUDY-2
FESTIVAL SEASON
Judder is a middle class man who decides to take credit
from a bank to open a cracker shop as it is Diwali time.
He goes to the bank and after a long process of
documentation in the bank, he gets a credit of 40000
at a very low rate of interest of 5% per annum. By the
end of the month he obtains a profit of 12000. He is
able to pay back the loan and making a good profit for
himself. He can now invest money in the bank for his
family.
CONCLUSIONS
From the above case studies, It can be concluded that
credit has both negative and positive effects on a person
as seen judder got profited but Ram got trapped in debt.
The effect of credit on a person also depends on the
formal and informal sources of credit as informal sources
e.g. moneylenders, traders etc give credit but at a very
high rate of interest whereas formal sources e.g. banks,
cooperative societies etc give credit at a very low rate of
interest.
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