BEYOND SAVINGS : BORROWING

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l Meaning of borrowing : Borrowing means receiving

something of value in exchange for an obligation to pay back something of usually greater value at a particular time in the future.

l Loan : Loan is an arrangement in which a lender gives money

or property to a borrower, and the borrower agrees to return it, usually alongwith interest at some future point of time.

l Interest rate : It is the rate at which interest is paid by

borrower for the use of money that they borrow from a lender.

l Equated Monthly Instalment (EMI) : EMI is the fixed

payment amount made by a borrower to a lender at a specified date in each calendar month. These are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.

l Amortization : It is the reduction of the value of an asset by

prorating its cost over a period of years. The term means the same as depreciation.

l Credit card : Credit card is a small plastic card issued by a

bank, society etc. It gives the holder an option to borrow funds, usually at point of sale.

l Home loan : It is a loan given by a bank, mortgaged company

or other financial institution to purchase a home.

l Personal Loan : A personal loan is made for any purpose

not specifically defined. It does not have to be secured by any assets. The recipients use the money for general purposes.

These are of two main types, i.e., secured personal loan and unsecured personal loan.

l Secured personal loan : It is backed by collateral or security

in the form of home, car or any other financial asset. Lack of payment will result in repossession of the property by the creditor.

l Unsecured personal loan : It is not secured by anything

other than the signature of the recipient. It is usually based on general creditworthiness of the person who borrows it.

l Education loan : It is a term loan granted to Indian Nationals

for persuing higher education in India or abroad where admission has been secured.

l Consumer loan : It is an amount of money lent to an

individual, usually on a non-secured basis for personal, family or household purposes. These are monitored by government regulatory agencies for their compliance with consumer protection regulations.

l Vehicle loan : Loans given for buying a vehicle listed under

assets of an individual or an organization.

l Fixed rate loans : These loans maintain the same interest rate

for the duration of the loan. Normally higher rates are charged by lenders because they may lose money if market interest rates increase.

l Floating interest rate : It is the rate of interest that is allowed

to move up and down with the rest of the market or alongwith an index. It is also called the variable interest rate because it can vary over the duration of the debt obligation.

l Processing charges : Loan process fee is a charge that

passes on costs to the borrowers for obtaining documentation appraisals, employment and credit history or any other information necessary for the lender’s underwriting department.

l Termination fee : An early termination fee is a charge levied

when a party wants to break the term of an agreement or long term contract.

l Prepayment of loan : The satisfaction of a debt or instalment

payment before its official due date e.g., payment of rent and early loan payments.

l Good loans : It is the loan which helps you build or buy the

most precious asset of lifetime e.g., house, land, education loan etc.

l Bad loans : This loan is usually taken to satisfy immediate

personal requirements or expenses like, buying consumer durables or going on vacation etc.

l Credit score : It is numerical expression based on a level

analysis of a person’s credit files, to represent the creditworthiness of that person.

l CIBIL : Credit Information Bureau (India) Limited is India’s

first Credit Information Company founded in August 2000. It collects and maintains records of an individual’s payments pertaining to loans and credit cards.

Multiple Choice Questions

1. The act of giving money to another party in exchange for future repayment of the principal amount along with interest is called

(a) Borrowing (b) Paying (c) Loan (d) Rate of Interest

2. A home loan taken to purchase a house or property for investment purpose is a

(a) Good loan (b) Bad loan

3. Vineet has taken a personal loan of 5 lakh rupees for an yearly interest rate of 13% and a tenure of 5 years, then the EMI of the loan is

(a) `10350 (b) `11475

4. The payment of loan including part of principal and some interest repaid at regular intervals are called

(b) Unsecured loans (c) Simple payment loans (d) Instalment loans

5. Which of the following statements is true? (a) The providers of loan capital are paid a dividend (b) Loan capital is money borrowed from outsiders

(d) Loan capital is money subscribed by shareholders of a company

6. EMI stands for

(a) Easy Monthly Instalment (b) Equated Monthly Instalment

7. To increase the given present value, the discount rate should be adjusted

(a) Downward (b) Upward (c) Parallel (d) Same

8. About an year ago, Vipin took a loan of `10,000 to buy a new mobile phone costing `11500. Today he finds that the price of that phone has come down to `7000. Now he is wondering why he took the loan. As per your opinion, which of the following is correct?

(a) Vipin should have saved money to buy a phone later (b) Vipin should not have saved money to buy a phone later

9. Puneet was looking for 2BHK (Two bed room apartment) two years back. Later, he dropped the idea as he was not having money to buy the property. He was not prepared to take loan though he was eligible for it. Now the price of the same property has gone up. It was logical to take loan two years back for buying property because

(a) Puneet would have saved the rent (b) Puneet would have got tax benefits

10. Public deposits represent loans from the public including

employees and shareholders of the company. Which is not an advantage of public deposit?

(a) No charge on assets (b) Flexibility (c) Risk to investors (d) No interference

11. Trade credit is the credit extended by one business firm to another as incidental to sale or purchase of goods and services. It has the advantage of

(a) Simple and convenient method (b) No formalities are involved

12. Instalment credit refers to the facility of buying machinery, equipment and other durable goods on credit. Which is not the feature of instalment credit?

(a) The buyer has to pay a part of the price of the asset at the time of delivery

(b) The balance is payable in a number of instalments (c) It is more economical than bank loans

(d) The supplier charges interest on the balance due 13. Which is not an advantage of bank credit?

(a) Flexible and can be repaid whenever desired (b) Loans are available for a short period

(d) Banks do not interfere in the management of client’s business

14. The borrower is required to pay the interest on the whole amount from the date of sanction in case of

(a) Taking loan (b) Buying goods (c) Doing expenditure (d) Transaction

15. Loans granted for some immediate need are known as (a) Transaction loans (b) Unsecured loans (c) Secured loans (d) Vehicle loans

16. Long term loans are raised by the companies from financial institutions. Which is not the limitation of it?

(a) Risk of financial insolvency (b) Interference with the management

17. Functions of financial markets include (a) Facilitate price discovery

(b) Provide liquidity to financial assets (c) Mobilise savings

(d) All of the above

18. In comparison to credit cards, the interest rate charged on bank loan is

(a) Higher (b) Lower

19. In case of failure to repay the loan, bank can affect your credit

(a) Positively (b) Negatively (c) Optimistically (d) Basically

20. The opportunity cost of holding money is determined by (a) the discount rate (b) the inflation rate

(c) the interest rate (d) the level of aggregate output 21. In terms of demand for money, the interest rate represents

(a) the rate at which current consumptions can be exchanged for future consumption

(b) the price of borrowing money

22. Reduction of the value of an asset by prorating its cost over a period of years is called

(a) Amortization (b) Interest rate (c) Termination fee (d) Processing charges

23. Anita earns `25,000 per month. She is the only earning number in the family of four. Her entire income goes towards meeting the household expenses. She wants a bank loan i.e., Personal loan to meet the expenses of her daughter’s marriage. Will she be able to get it from the bank?

(a) Yes, after giving or depositing collateral (b) Yes, without any collateral

24. Kamal was a call centre employee and had taken a car loan three years back. He left the job a year back after the illness. After that, he could not pay the monthly instalment of the car loan. Now, he needs a loan for starting a company of his own. Will Kamal get the loan?

(a) Yes, as he is not sick now

(b) Yes, because he wants to open a company (c) No, because his creditworthiness is not good (d) No, because he wants to open a company

25. Vijay wants to buy an apartment of `50 lakhs in Delhi. If he takes a housing loan from a bank, then the original documents of the house will

(a) Be with him (b) Be with the broker (c) Be with the bank (d) Be with the government 26. Sonu is crazy about bikes and wants to buy it which is

priced around `1,00,000. He plans to take a loan from the bank for the entire amount. If the bank agrees to give him the loan, will the bank deposit the loan amount in his bank account or will they give him in cash?

(a) Give him cash (b) Give him bike

27. What are the parameters for taking bank loan and calculating EMI?

(a) Amount of loan (b) Loan period (c) Rate of interest (d) All of the above

28. Meena wants to take loan for meeting her household expenditure because her income is less than the expenditure. How much should she borrow following the 70-20-10 rule?

(a) Borrow less (b) Borrow more (c) Should not borrow (d) None of these

29. An option given to the holder to borrow funds usually at point of sale, is

(a) Credit Card (b) Debit Card (c) ID Card (d) PAN Card

30. Loan given by a bank, mortgage company or other financial institution to purchase a property is called

(a) Secured loan (b) Unsecured loan (c) Personal loan (d) Home loan

31. Loans monitored by government regulatory agencies for their compliance with consumer protection regulations are known as

(a) Personal loan (b) Secured loan (c) Consumer loan (d) Vehicle loan

32. Rate of interest that is allowed to move up and down with an index is

(a) Fixed rate of interest (b) Floating rate of interest (c) Zero rate of interest (d) High rate of interest

33. The loan secured only by the signature of the recipient is called

(a) Secured loan (b) Unsecured loan (c) Education loan (d) Personal loan 34. Loan backed by collateral is called

(a) Unsecured loan (b) Secured loan (c) Home loan (d) Vehicle loan

35. Loan that helps in building the most precious asset of lifetime is known as

(a) Good loan (b) Bad loan (c) Personal loan (d) Consumer loan

36. Loan taken usually to satisfy immediate personal requirements is considered

(a) Good loan (b) Bad loan

(a) Credit Information Bureau India Ltd. (b) Credit Information Business India Ltd.

(c) Credit India Business of Information Ltd. (d) Credit Information Broadcasting India Ltd. 38. The creditworthiness of a person is represented by

(a) Bank score (b) Interest score (c) Credit score (d) Debit score 39. Borrowing should be individual’s

(a) Need based (b) Comfort based (c) Luxury based (d) None of the above 40. Cost attached to the borrowings is called

(a) Rate of interest (b) Multiple cost (c) Basic cost (d) Fixed cost

Answers

1. (c) 2. (a) 3. (c) Note : EMI = P + + 1 r r r n n 1 1

(

)

(

)

−

where, P = Principal loan amount r = Annual interest rate/12

n = Number of monthly instalments

4. (d) 5. (b) 6. (b) 7. (a)

8. (a) Explanation : He should have saved money to buy the

mobile phone, instead of taking loan. In this way, he would have got the call phone at a lower price. Besides this he would have saved the money that he had to pay towards interest on the loan. Another advantage is that he would have earned some interest on the saved money by keeping it in bank account.

9. (d) 10. (c) 11. (d) 12. (c) 13. (b)

14. (a) 15. (a) 16. (d) 17. (d) 18. (b)

19. (b) 20. (c) 21. (d) 22. (a) 23. (a)

24. (c) 25. (c)

26. (c) Note : The sanctioned amount of loan is credited in the debtor’s account. Bank charges interest on the whole amount from the day it was sanctioned. Loan is never given to the borrower in the form of cash.

27. (d)

28. (a) Explanation : She should allocate her monthly income properly and borrow less.

The 70-20-10 rate states that :

l 70% is allocated for living expenses (rent, food,

clothing etc)

l 20% is allocated for saving (retirement, investment,

emergency fund etc).

l 10% is allocated for debt repayment or fun money.

29. (a) 30. (d) 31. (c) 32. (b) 33. (b)

34. (b) 35. (a) 36. (b) 37. (a) 38. (c)

In document Nflat Book (Page 87-97)