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Questions and Answers
Ragini's parents are planning to buy her a scooter by taking a loan of ₹18,000, which is to be paid back in 3 years with monthly installments of ₹500. Which of the following statements reflects the advantage of this type of borrowing?
Ragini's parents are planning to buy her a scooter by taking a loan of ₹18,000, which is to be paid back in 3 years with monthly installments of ₹500. Which of the following statements reflects the advantage of this type of borrowing?
- Ragini's father can use the saved school bus fare amount to pay the loan interest.
- Ragini's parents can avoid the need to save money for a large purchase upfront, spreading the cost over time. (correct)
- Ragini's parents will own the scooter immediately while paying back the loan in installments.
- The bank will bear the maintenance costs of the scooter until the loan is fully repaid.
Sridhar took a loan to buy a car, using his savings and selling his old motorcycle. What is the most likely reason the bank agreed to give him the loan?
Sridhar took a loan to buy a car, using his savings and selling his old motorcycle. What is the most likely reason the bank agreed to give him the loan?
- Sridhar was a regular worker with savings in the bank, indicating a stable financial position. (correct)
- Sridhar's employer guaranteed the loan repayment.
- Sridhar had a high credit score from previous loans.
- Sridhar promised to deposit a fixed amount every month.
Loans often carry an interest that is a fraction of the loan amount which is calculated annually. What is the implication of taking a longer time to repay a loan?
Loans often carry an interest that is a fraction of the loan amount which is calculated annually. What is the implication of taking a longer time to repay a loan?
- The borrower will pay less in total because the principal decreases faster.
- The interest rate decreases, reducing the financial burden.
- The borrower will pay less interest overall because of the longer repayment period.
- The borrower will pay more interest overall because interest accrues over a longer period. (correct)
Which of these professions would likely face the most difficulty in obtaining a loan from a formal financial institution?
Which of these professions would likely face the most difficulty in obtaining a loan from a formal financial institution?
Consider a loan of ₹1,00,000 with a 10% annual interest rate. If the borrower does not pay on time, besides the accrued interest, what additional financial consequence might they face?
Consider a loan of ₹1,00,000 with a 10% annual interest rate. If the borrower does not pay on time, besides the accrued interest, what additional financial consequence might they face?
Flashcards
Good Borrowing
Good Borrowing
Borrowing in installments to acquire an asset like a house or vehicle.
Loan Accessibility
Loan Accessibility
Loans may not be easily available to individuals with low or irregular income.
Asset Ownership
Asset Ownership
The ownership of an asset is transferred to the borrower after repaying the loan with interest.
Loan Interest
Loan Interest
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EMI (definition)
EMI (definition)
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Study Notes
- Borrowing can help individuals create assets like a house or vehicle and improve their lives
- Borrowing can enable commuting to work or school after purchasing a motorcycle, scooter, or car
- One can use the asset immediately and create equity by paying back the loan
- The borrower only gains ownership of the asset like a house or vehicle after repaying the loan
Ragini's Example of Borrowing
- Ragini is in class 7 and takes a school bus, costing her parents ₹500 monthly
- Her parents spend ₹6000 annually on bus fare
- Ragini's mother plans to buy her a scooter to drive her to school, do grocery shopping, and other work
- The electric scooter is expected to save ₹18,000 in bus fares over three years (₹6,000 x 3)
- The scooter could become an easily affordable asset through installments with the help of the bank
Negative Side of Loans
- Loans are not easily available for individuals with very low or irregular income, such as hawkers, street vendors, or daily wage workers
- Financial institutions prefer lending to individuals with regular earnings from employment or business
- The loan amount depends on the person's total annual income
- The borrower gains ownership of a house or vehicle only after repaying the loan with interest
- Interest is calculated as a fraction of the loan amount annually, and the longer the repayment period, the higher the interest
- A loan of ₹1,00,000 at 10% interest per year becomes ₹1,10,000 after one year and ₹1,20,000 after two years, If the borrower delays paying the loan payments a fine may be charged
Sridhar's Example of Borrowing
- Sridhar secured a sales job at a paint company after finishing his studies
- He visited paint dealers and attended to their needs
- He used a motorcycle owned by his employer for commuting, with petrol expenses covered
- After saving ₹50,000 over two years, Sridhar checked with banks to get a loan to buy a car
- Because he was a regular worker with savings, the bank approved his loan
- Sridhar took a loan of ₹3,50,000 and used his ₹50,000 savings to buy a new car for ₹4,00,000
- He sold his old motorcycle for ₹20,000 to repay the rest of the loan by using EMIs
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