Consider the following statements regarding the impact of high cost of borrowing: 1. A larger part of the earnings of the borrowers is used to repay the loan. 2. The repayment amount is always less than the income of the borrower. 3. It may discourage people from starting enterprises due to the debt burden. Which of the statements given above is/are correct?

Correct Option The correct option is 1 and 3 only. Explanation The cost of borrowing refers to the interest rate charged on loans. It represents the price paid for the use of capital. High borrowing costs directly influence the disposable income of households and the investment decisions of firms, serving as a critical channel for monetary policy transmission. Statement-wise Analysis - Statement 1 is Correct: When the cost of borrowing (interest rate) is high, the debt servicing obligation increases. Consequently, a larger proportion of the borrower's earnings must be allocated to repaying the interest and principal, leaving less disposable income for consumption or savings. - Statement 2 is Incorrect: The repayment amount is not always less than the income of the borrower. In situations known as a debt trap, high interest rates or compounding debt can cause repayment obligations to exceed the borrower's current income. This forces the borrower to incur further debt to pay off existing loans, a common issue in informal credit markets or distressed agricultural sectors. - Statement 3 is Correct: High interest rates increase the cost of capital for entrepreneurs. For a business to be viable, the return on investment must exceed the cost of borrowing. High costs reduce profit margins and increase financial risk, thereby discouraging individuals from starting new enterprises or expanding existing ones. Key Takeaway High borrowing costs reduce the disposable income of borrowers and disincentivize investment by increasing the cost of capital. If debt service obligations exceed income, it leads to a debt trap, negating the assumption that repayment is always less than earnings.

NCERT Class 10 Economics — Chapter 3: Money and Credit

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Consider the following statements regarding the impact of high cost of borrowing:

A larger part of the earnings of the borrowers is used to repay the loan.
The repayment amount is always less than the income of the borrower.
It may discourage people from starting enterprises due to the debt burden.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B1, 2 and 3
C2 only
D1 and 3 only

Did you get this right?

Solution

Correct Option

The correct option is 1 and 3 only.

Explanation

The cost of borrowing refers to the interest rate charged on loans. It represents the price paid for the use of capital. High borrowing costs directly influence the disposable income of households and the investment decisions of firms, serving as a critical channel for monetary policy transmission.

Statement-wise Analysis

Statement 1 is Correct: When the cost of borrowing (interest rate) is high, the debt servicing obligation increases. Consequently, a larger proportion of the borrower's earnings must be allocated to repaying the interest and principal, leaving less disposable income for consumption or savings.
Statement 2 is Incorrect: The repayment amount is not always less than the income of the borrower. In situations known as a debt trap, high interest rates or compounding debt can cause repayment obligations to exceed the borrower's current income. This forces the borrower to incur further debt to pay off existing loans, a common issue in informal credit markets or distressed agricultural sectors.
Statement 3 is Correct: High interest rates increase the cost of capital for entrepreneurs. For a business to be viable, the return on investment must exceed the cost of borrowing. High costs reduce profit margins and increase financial risk, thereby discouraging individuals from starting new enterprises or expanding existing ones.

Key Takeaway

High borrowing costs reduce the disposable income of borrowers and disincentivize investment by increasing the cost of capital. If debt service obligations exceed income, it leads to a debt trap, negating the assumption that repayment is always less than earnings.

Your note

More from Chapter 3: Money and Credit

Consider the following statements regarding the 'Cheque' facility: 1. The payee instructs the bank to withdraw money from the payer's account. 2. It allows for the direct settlement of payments without the use of cash. 3. Cheques are a form of currency issued by the RBI. Which of the statements given above is/are correct?

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With reference to the credit needs in rural areas, consider the following statements: 1. The main demand for credit is for crop production. 2. There is no time gap between buying inputs and selling the crop. 3. Repayment of the loan is crucially dependent on the income from farming. Which of the statements given above is/are correct?

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Consider the following statements regarding the 'Krishak Cooperative': 1. It does not accept deposits from its members. 2. It uses deposits as collateral to obtain a large loan from the bank. 3. It provides loans for various purposes including house construction. Which of the statements given above is/are correct?

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Consider the following statements regarding the supervision of credit activities in India: 1. The World Bank supervises the functioning of formal sources of loans. 2. There is no organisation that supervises the credit activities of lenders in the informal sector. 3. Banks are not required to share any lending information with the RBI. Which of the statements given above is/are correct?

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With reference to Cooperative Societies, consider the following statements: 1. They are a major source of cheap credit in rural areas. 2. Members operate individually without pooling resources. 3. Cooperatives cannot obtain loans from banks; they must rely solely on member deposits. Which of the statements given above is/are correct?

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Correct Option

The correct option is 1 and 3 only.

Explanation

Statement-wise Analysis

Statement 1 is Correct: When the cost of borrowing (interest rate) is high, the debt servicing obligation increases. Consequently, a larger proportion of the borrower's earnings must be allocated to repaying the interest and principal, leaving less disposable income for consumption or savings.
Statement 2 is Incorrect: The repayment amount is not always less than the income of the borrower. In situations known as a debt trap, high interest rates or compounding debt can cause repayment obligations to exceed the borrower's current income. This forces the borrower to incur further debt to pay off existing loans, a common issue in informal credit markets or distressed agricultural sectors.
Statement 3 is Correct: High interest rates increase the cost of capital for entrepreneurs. For a business to be viable, the return on investment must exceed the cost of borrowing. High costs reduce profit margins and increase financial risk, thereby discouraging individuals from starting new enterprises or expanding existing ones.