A borrower who takes a second loan to repay the first often finds the debt growing rather than shrinking. Usi…

Question

A borrower who takes a second loan to repay the first often finds the debt growing rather than shrinking. Using the concept of a debt trap, explain why this cycle is so difficult to break and what conditions make a borrower particularly vulnerable to it.

Accepted Answer

## Model Answer A **debt trap** occurs when a borrower takes a new loan to repay an existing one, causing debt to grow rather than reduce. Swapna's case illustrates this: crop failure made repayment impossible, so debt accumulated, forcing her to sell land. Borrowers are most vulnerable when they face high-risk situations (crop failure, illness), lack collateral for cheap formal credit, and must rely on moneylenders charging very high interest rates (e.g., 60% per annum), making repayment nearly impossible from limited earnings. *Source: Chapter 3, Two Different Credit Situations* --- ## Explanation - Examiners expect: definition/explanation of debt trap + specific vulnerability conditions. - Key terms to use: *debt trap*, *collateral*, *informal sources*, *high interest rate*, *risk*. - Swapna's example is the textbook illustration — always anchor answers in it. - Avoid generic statements; link vulnerability directly to high-risk situations and lack of formal credit access.

Social Science (087) — AI-generated practice question