Q20 of 38 Page 1

Rita has taken a loan of Rs. 7 lakhs from the bank to purchase a car. The annual interest rate on the loan is 14.5 percent and the loan is to be repaid in 3 years in monthly installments. The bank retained the papers of the new car as collateral, which will be returned to Rita only when she repays the entire loan with interest.

Analyze the loan information given above, considering one of the following correct options.


Terms of credit. It includes the details of interest rate, collateral, documentation required and the mode of repayment.It may differ from one credit arrangement to another depending upon the nature of the lender and borrower. It is also different between the formal and informal lender. The Collateral that is used in this example is an asset that the borrower owns which can be used as a guarantee to a lender until the repayment of the loan. In this case, Rita has used the papers of the new car as collateral which will be repaid to her only after the repayment of the entire loan amount with interest

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