Credit Cards and Loans - Bank Theory
Credit Cards, Home Loans, Personal Loans, and Consumer Loans
Credit Cards
A credit card is a financial product that allows the cardholder to borrow funds up to a pre-approved limit to make purchases or withdraw cash. Interest is charged on the outstanding balance if it is not paid within the due date.
Example: If a customer has a credit card with a ₹50,000 limit and makes a purchase worth ₹10,000, they will have ₹40,000 of credit remaining.
Mathematical Illustration:
Outstanding Balance = ₹10,000
Annual Interest Rate = 36%
Monthly Interest = 36% / 12 = 3%
Interest for 1 month = ₹10,000 × 3% = ₹300
Home Loans
Home loans are long-term loans provided by banks or financial institutions to purchase, build, or renovate a home. They are usually secured by the property itself.
Example: A borrower takes a ₹30,00,000 home loan at 8% interest for 20 years.
Mathematical Illustration (EMI Formula):
EMI = [P × R × (1+R)N] / [(1+R)N - 1]
Where P = ₹30,00,000, R = 8%/12 = 0.00667, N = 240
EMI ≈ ₹25,093
Personal Loans
Personal loans are unsecured loans offered based on the borrower’s income, credit history, and repayment capacity. They have a fixed repayment tenure and interest rate.
Example: A salaried individual borrows ₹2,00,000 for 2 years at 12% interest rate.
Mathematical Illustration:
Monthly Rate = 12% / 12 = 1%
N = 24, P = ₹2,00,000
EMI ≈ ₹9,407
Consumer Loans
Consumer loans are loans given for the purchase of consumer durable goods like TVs, washing machines, etc. They are generally short-term and can be secured or unsecured.
Example: A customer buys a refrigerator worth ₹60,000 on a 1-year consumer loan at 15% annual interest.
Mathematical Illustration:
Simple Interest = (P × R × T)/100 = ₹60,000 × 15 × 1 / 100 = ₹9,000
Total Repayment = ₹60,000 + ₹9,000 = ₹69,000
Multiple Choice Questions (MCQs)
1. What is the typical feature of a credit card?
A. No credit limit
B. Interest-free period
C. Requires collateral
D. Long tenure
Answer: B
2. Which of the following is a secured loan?
A. Credit Card
B. Personal Loan
C. Home Loan
D. Consumer Loan (unsecured)
Answer: C
3. What does EMI stand for?
A. Equal Money Installment
B. Equal Monthly Installment
C. Easy Monthly Installment
D. Equated Monetary Investment
Answer: B
4. Personal loans are usually:
A. Secured
B. Unsecured
C. Subsidized
D. Corporate only
Answer: B
5. Which is a common purpose of consumer loans?
A. To buy real estate
B. To purchase gold
C. To purchase electronic appliances
D. For business expansion
Answer: C
6. What is the usual repayment period for personal loans?
A. 1-5 years
B. 10-20 years
C. Over 25 years
D. Less than 6 months
Answer: A
7. What happens if a credit card payment is delayed?
A. No consequences
B. Higher credit limit
C. Interest and penalties
D. Loan waiver
Answer: C
8. Which loan is usually backed by the asset being financed?
A. Home Loan
B. Credit Card
C. Personal Loan
D. Travel Loan
Answer: A
9. The EMI for a loan increases if:
A. Tenure increases
B. Interest rate decreases
C. Principal decreases
D. Interest rate increases
Answer: D
10. Which of the following does not require credit score for approval?
A. Personal Loan
B. Home Loan
C. Credit Card
D. Gift Card
Answer: D
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