With reference to the 'Terms of Credit', consider the following statements: 1. Terms of credit refer only to the interest rate. 2. The mode of repayment is a component of the terms of credit. 3. Terms of credit vary substantially from one credit arrangement to another. Which of the statements given above is/are correct?

The correct option is 2 and 3 only. Explanation In the context of banking and finance, 'Terms of Credit' refers to the set of conditions agreed upon by the borrower and the lender before a loan is sanctioned. These conditions define the obligations of the borrower and the rights of the lender. Statement-wise Analysis: - Statement 1 is Incorrect: The terms of credit do not refer only to the interest rate. While the interest rate is a primary component, the concept is broader and encompasses other essential conditions such as collateral, documentation, and repayment schedules. - Statement 2 is Correct: The mode of repayment is a fundamental component of the terms of credit. It specifies how and when the loan must be repaid (e.g., monthly installments, lump sum payment, or flexible duration). - Statement 3 is Correct: Terms of credit vary substantially depending on the nature of the lender and the borrower. For instance, formal sector loans (banks) typically require strict documentation and collateral, whereas informal sector loans (moneylenders, friends) may have flexible or different terms regarding interest and repayment. Key Takeaway: The four main components of the Terms of Credit are the interest rate, collateral (security), documentation requirement, and the mode of repayment.

NCERT Class 10 Economics — Chapter 3: Money and Credit

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With reference to the 'Terms of Credit', consider the following statements:

Terms of credit refer only to the interest rate.
The mode of repayment is a component of the terms of credit.
Terms of credit vary substantially from one credit arrangement to another.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A2 only
B1, 2 and 3
C1 and 2 only
D2 and 3 only

Did you get this right?

Solution

The correct option is 2 and 3 only.

Explanation

In the context of banking and finance, 'Terms of Credit' refers to the set of conditions agreed upon by the borrower and the lender before a loan is sanctioned. These conditions define the obligations of the borrower and the rights of the lender.

Statement-wise Analysis:

Statement 1 is Incorrect: The terms of credit do not refer only to the interest rate. While the interest rate is a primary component, the concept is broader and encompasses other essential conditions such as collateral, documentation, and repayment schedules.
Statement 2 is Correct: The mode of repayment is a fundamental component of the terms of credit. It specifies how and when the loan must be repaid (e.g., monthly installments, lump sum payment, or flexible duration).
Statement 3 is Correct: Terms of credit vary substantially depending on the nature of the lender and the borrower. For instance, formal sector loans (banks) typically require strict documentation and collateral, whereas informal sector loans (moneylenders, friends) may have flexible or different terms regarding interest and repayment.

Key Takeaway:
The four main components of the Terms of Credit are the interest rate, collateral (security), documentation requirement, and the mode of repayment.

Your note

More from Chapter 3: Money and Credit

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?

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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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Keep practising Chapter 3: Money and Credit

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The correct option is 2 and 3 only.

Explanation

Statement-wise Analysis:

Statement 1 is Incorrect: The terms of credit do not refer only to the interest rate. While the interest rate is a primary component, the concept is broader and encompasses other essential conditions such as collateral, documentation, and repayment schedules.
Statement 2 is Correct: The mode of repayment is a fundamental component of the terms of credit. It specifies how and when the loan must be repaid (e.g., monthly installments, lump sum payment, or flexible duration).
Statement 3 is Correct: Terms of credit vary substantially depending on the nature of the lender and the borrower. For instance, formal sector loans (banks) typically require strict documentation and collateral, whereas informal sector loans (moneylenders, friends) may have flexible or different terms regarding interest and repayment.

Key Takeaway:
The four main components of the Terms of Credit are the interest rate, collateral (security), documentation requirement, and the mode of repayment.