📊 NISM Series X-A Chapter 4 of 20 ⚖ 9 marks weightage Case-Based ✓

Ch.4: Debt Management and Loans

Q: A person earns ₹15,000 a month and pays ₹7,500 in EMIs. What is the debt servicing ratio, and is it healthy?

50%, which is too high. ₹7,500 ÷ ₹15,000 = 50%. Such a high share leaves little for living costs, emergencies and saving.

Q: Why should debt servicing be kept relatively low even when income can cover a higher EMI?

To leave room to borrow more in an emergency. If servicing is already high, a crisis leaves little room to raise more funds. Lenders agree that a lower DTI is better, though there is no single ideal figure.

Q: Which of these is investment expenditure rather than consumption expenditure?

Buying a bond. Investment expenditure creates an asset that can generate future income. Consumption spending creates no such asset.

Q: What approach to saving does the chapter recommend?

Income − Savings = Expenses (save first, then spend). Paying yourself first, for example through an SIP auto-debited from salary, ensures goals are funded before discretionary spending.

Q: Which use of debt is most risky for a household?

Margin financing to invest in the stock market. Debt on volatile investments magnifies losses because the borrowing cost must still be paid if prices fall.

Practice questions for NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination (mandated by SEBI under the Investment Advisers Regulations, 2013). Chapter 4 carries 9 out of 150 marks in the final examination. The exam has 90 MCQs + 9 case-based sets (5 sub-questions each, mixed 1-mark and 2-mark weighting), 180-minute duration, 60% passing score, and 25% negative marking on the marks of each wrong answer.

MCQ

Case Sets

Total Qs

Exam Marks

60%

Pass Score

−25%

Neg. Marking

What You Will Learn in This Chapter

Understand types of loans and their features — home, personal, auto, education
Calculate EMI and understand loan amortization schedules
Evaluate good debt versus bad debt and manage credit scores

Key Terms:EMIamortization schedulecredit scoresecured loanunsecured loanloan-to-value ratioprepayment

Chapter 4 in 10 minutes: debt management and loans

Chapter 4 is about using debt wisely. X-A questions test loan vocabulary (pledge, hypothecation, moratorium), credit score rules, debt servicing ratios, EMI and restructuring calculations, and the three debt-reduction methods. Learn the terms table and practise the numericals.

1. Good debt, bad debt

Debt makes sense for big goals savings cannot cover in time, such as a house, and for raising earning power, such as an education loan.
Avoid debt for regular expenses, which is a sign of a debt trap, and for volatile investments such as margin trading, where losses are magnified.
Debt servicing ratio = EMIs ÷ income. At 50% (₹7,500 of ₹15,000) it is too high. A lower ratio leaves room to borrow in a crisis.
Budget as Income − Savings = Expenses. Use zero-base budgeting, track spending above a set limit, and save a good part of any windfall.

2. Cost, tenure and rescheduling

Secured loans (home, car, gold, securities) are cheaper than unsecured ones (personal loans, cards, P2P). A card at 3% a month costs about 42.6% a year once it revolves. A longer tenure means a lower EMI but more total interest. If repayment gets hard: clear the costliest debt first, sell the financed asset, refinance more cheaply, extend the tenure, or as a last resort ask the lender to reschedule, which hurts the credit score.

3. Credit scores

Bureaus are licensed by RBI under the Credit Information Companies (Regulation) Act, 2005. The CIBIL score runs from 300 to 900. Pay on time, keep utilisation low, keep a mix of credit and limit enquiries. Loans you guarantee count too. You get one free full report a calendar year from each bureau (CIBIL, Experian, CRIF High Mark, Equifax).

4. Loan terms

Term	Meaning
Pledge	Movable asset held by the lender until repayment
Hypothecation	Charge on an asset the borrower keeps using (car loans)
Mortgage	Loan secured on immovable property
Hire purchase vs lease	Hire purchase ends in ownership; a lessee never owns the asset
Pre-EMI	Interest-only payments while an under-construction property loan is partly disbursed
Moratorium	Payments paused without default, but interest keeps accruing
Prepayment	No charges allowed on floating-rate home loans to individuals from banks
Floating rate	Resets with a benchmark such as repo (external) or MCLR (internal)

5. Calculations to practise

₹1 lakh at 1% a month for 60 months → EMI ≈ ₹2,224. With ₹10,000 income the ratio is 22.2%; over 72 months the EMI is ≈ ₹1,955.
₹10 lakh at 7% for 10 years → EMI ≈ ₹11,610. First month: interest ₹5,833 (IPMT), principal ₹5,777 (PPMT).
Restructuring: ₹3 lakh at 7% → EMI ₹9,263 over 36 months or ₹5,940 over 60. A longer tenure keeps the present value the same. A haircut to ₹2 lakh (EMI ₹6,175) is real relief.
An annual interest rest with monthly payments makes the effective cost higher than the quoted rate.

6. Invest or repay, and the three methods

Always clear very costly debt such as cards and personal loans first. Against a cheap home loan, long-term investing may win, but it carries risk. To clear several debts:

Avalanche: highest interest rate first, which keeps total interest lowest.
Snowball: smallest balance first, for motivation.
Blizzard: snowball first, then switch to avalanche.

Summary written by BullWiser from the NISM Series X-A workbook (March 2026 edition), Chapter 4. Always refer to the current NISM workbook before your exam.

Multiple Choice Questions (49)

Q1 MCQ · 1 mark EasyNeed for debt

Why do most people need a loan to buy a house?

ATax law requires a loan

BLoans are always cheaper than savings

CThe cost is so large that saving the full amount could take until near retirement

DBanks do not accept cash for property

Q2 MCQ · 1 mark MediumNeed for debt

Why might an education loan be better than withdrawing retirement savings to pay for a child's education?

AThe retirement money keeps compounding, and future income can repay the loan

BEducation loans have no interest

CRetirement accounts cannot be withdrawn

DEducation loans never need repayment

Q3 MCQ · 1 mark MediumDebt-to-income

A person earns ₹15,000 a month and pays ₹7,500 in EMIs. What is the debt servicing ratio, and is it healthy?

A20%, which is too low

B50%, which is ideal

C200%, which is acceptable

D50%, which is too high

Q4 MCQ · 1 mark MediumDebt-to-income

Why should debt servicing be kept relatively low even when income can cover a higher EMI?

ABanks forbid EMIs above 10% of income

BTo leave room to borrow more in an emergency

CLow EMIs are tax-free

DHigher EMIs reduce credit scores directly

Q5 MCQ · 1 mark EasyConsumption vs investment

Which of these is investment expenditure rather than consumption expenditure?

AEating at a restaurant

BBuying clothes

CBuying a bond

DA salon visit

Q6 MCQ · 1 mark MediumBudgeting

What approach to saving does the chapter recommend?

AIncome − Savings = Expenses (save first, then spend)

BIncome − Expenses = Savings (save what is left)

CBorrow to invest and repay later

DSpend first and invest any windfall

Q7 MCQ · 1 mark MediumBudgeting

What is zero-base budgeting when applied to a household?

AKeeping a zero balance in the bank

BBuilding each expense from scratch instead of adjusting last year's budget

CHaving zero loans

DSpending zero on all discretionary items

Q8 MCQ · 1 mark MediumBudget holes

Why does an adviser ask a client to note down every expense above a set limit?

ATo calculate income tax

BTo qualify for a credit card

CTo report spending to the bank

DTo reveal avoidable spending the client may not have noticed

Q9 MCQ · 1 mark MediumWindfalls

A client gets an unexpectedly large bonus. What is sensible advice?

AInvest it all in one stock immediately

BSet a healthy part aside for the future and consider prepaying loans

CAssume a similar bonus every year and plan spending around it

DSpend it all, since the family managed without it

Q10 MCQ · 1 mark MediumPurpose of debt

Which use of debt is most risky for a household?

AA short-term loan for a temporary cash gap with a repayment plan

BAn education loan to upskill

CMargin financing to invest in the stock market

DA home loan for a house to live in

Q11 MCQ · 1 mark MediumPurpose of debt

A person regularly borrows to meet monthly household expenses. What does this suggest?

AThey are using leverage wisely

BTheir credit score will improve

CThey are following the avalanche method

DThey are living beyond their means and risk a debt trap

Q12 MCQ · 1 mark HardCost of debt

A credit card charges 3% a month on revolving balances. What is the approximate effective annual cost?

AAbout 42.6%

B36%

C30%

D12%

Q13 MCQ · 1 mark EasyCost of debt

When is a credit card effectively an interest-free loan?

AWhen the full bill is paid by the due date

BWhen only the minimum amount is paid

CWhen the balance is carried for up to a year

DAlways, for amounts under ₹50,000

Q14 MCQ · 1 mark MediumMaturity of debt

What is the trade-off when choosing a longer loan tenure?

ALower EMI and less total interest

BLower EMI but more total interest

CHigher EMI and more total interest

DHigher EMI and less total interest

Q15 MCQ · 1 mark MediumDebt rescheduling

A struggling borrower has credit card dues, a personal loan and a home loan. Which should they tackle first?

AThe home loan, because it has tax benefits

BAll loans equally

CThe credit card dues and personal loan, as the costliest debts

DThe home loan, as the largest debt

Q16 MCQ · 1 mark MediumDebt rescheduling

What is the downside of asking a lender to reschedule a loan?

AThe lender must forgive the loan

BIt always increases the interest rate to 24%

CIt is illegal

DIt hurts the borrower's credit history and score

Q17 MCQ · 1 mark MediumCredit score

What range does the CIBIL TransUnion score fall in?

A500 to 850

B0 to 100

C300 to 900

D100 to 1,000

Q18 MCQ · 1 mark MediumCredit score

Which behaviour helps build a good credit score?

AUsing the full credit card limit every month

BPaying all dues on time and keeping credit utilisation low

CTaking only unsecured loans

DApplying for many loans at once

Q19 MCQ · 1 mark HardCredit score

A person stood as guarantor on a friend's loan, and the friend defaults. How can this affect the person?

AIt has no effect, as they are not the borrower

BIt improves their score

COnly the bank's score is affected

DTheir own credit score can be hurt

Q20 MCQ · 1 mark MediumFree credit report

Under RBI rules, how often is an individual entitled to a free full credit report from each credit bureau?

AOnce every calendar year

BOnce a month

COnce every five years

DOnly when a loan is rejected

Q21 MCQ · 1 mark EasySecured vs unsecured

Which of these is an unsecured loan?

AGold loan

BPersonal loan

CHome loan

DCar loan

Q22 MCQ · 1 mark MediumSecured vs unsecured

Why are secured loans usually cheaper than unsecured loans?

ASecured loans are always short-term

BSecured borrowers pay no processing fee

CSecured loans are subsidised by RBI

DThe lender can sell the security if the borrower defaults

Q23 MCQ · 1 mark MediumLoan terms

When does a fixed-rate loan make most sense for a borrower?

AWhen rates are low and the borrower wants to lock them in

BNever, fixed rates are banned

CWhen rates are expected to fall sharply

DWhen the borrower wants the EMI to change every quarter

Q24 MCQ · 1 mark MediumLoan terms

What is the key difference between hire purchase and a lease?

ANeither involves periodic payments

BA lease transfers ownership; hire purchase never does

CIn hire purchase the user becomes the owner after the last instalment; in a lease the lessor stays the owner

DBoth transfer ownership at the end

Q25 MCQ · 1 mark MediumAmortisation

How does the make-up of an EMI change over the life of a loan?

AThe EMI is all principal in the first year

BThe interest share falls and the principal share rises over time

CThe split stays the same throughout

DThe interest share rises over time

Q26 MCQ · 1 mark MediumPrepayment

What is RBI's rule on prepayment charges for floating-rate home loans taken by individuals from banks?

ACharges apply only after the third year

BBanks must charge 2% on prepayment

CPrepayment is banned for the first five years

DBanks cannot levy prepayment charges

Q27 MCQ · 1 mark MediumPre-EMI

When does a borrower usually pay pre-EMI interest?

AWhen a loan for an under-construction property is only partly disbursed

BOn gold loans every month

COnly on credit cards

DAfter the loan is fully repaid

Q28 MCQ · 1 mark HardMoratorium

What happens to interest during a loan moratorium?

AIt is paid by the government

BIt is waived completely

CIt keeps accruing, so the total dues increase

DIt stops and the EMIs are cancelled

Q29 MCQ · 1 mark MediumSecurity types

Which arrangement describes a typical car loan?

APledge: the lender keeps the car until repaid

BLease: the bank owns the car forever

CMortgage: the car is registered to the bank

DHypothecation: the borrower keeps the car, and the lender can repossess it on default

Q30 MCQ · 1 mark MediumSecurity types

In which arrangement does the lender hold the movable asset until the loan is repaid?

APledge

BMoratorium

CMortgage

DHypothecation

Q31 MCQ · 1 mark MediumTypes of loans

When does repayment of an education loan usually begin?

AImmediately on disbursement

BAfter the course ends or when the student starts earning, whichever is earlier

COnly when the parent retires

DOnly after 10 years

Q32 MCQ · 1 mark MediumTypes of loans

How is interest charged on an overdraft facility?

AOnly if the account is closed

BAs a fixed annual fee regardless of use

COnly on the amount overdrawn, for the days it is used

DOn the full sanctioned limit from day one

Q33 MCQ · 1 mark MediumTypes of loans

What can a lender ask for if the value of shares pledged for a loan against securities falls sharply?

AAdditional money or security to cover the fall

BConversion of the loan to a grant

CNothing, the loan is fixed

DImmediate sale of the borrower's house

Q34 MCQ · 1 mark MediumP2P lending

In peer-to-peer (P2P) lending, who is the lender?

AA mutual fund

BA scheduled bank

CAn individual lending through a P2P platform

DRBI

Q35 MCQ · 1 mark HardEMI calculation

A ₹1 lakh loan at 1% a month is repaid over 60 months. The EMI is about ₹2,224. If the borrower earns ₹10,000 a month, what is the debt servicing ratio?

AAbout 2.2%

BAbout 45%

CAbout 12%

DAbout 22.2%

Q36 MCQ · 1 mark HardEMI calculation

Why does a loan with annual interest rest but monthly repayments cost more than its quoted rate?

AThe EMI includes insurance premium

BMonthly repayments only reduce the balance for interest purposes once a year

CThe quoted rate is always a monthly rate

DBanks charge GST on each EMI

Q37 MCQ · 1 mark HardLoan restructuring

A ₹3 lakh loan at 7% over 36 months has an EMI of about ₹9,263. Extending it to 60 months cuts the EMI to about ₹5,940. In present-value terms, what has changed for the lender?

AThe borrower now owes less in total

BThe lender has given a ₹1.2 lakh discount

CThe interest rate has been cut to 5%

DNothing; the new EMIs still have a present value equal to the loan

Q38 MCQ · 1 mark HardLoan restructuring

In the same ₹3 lakh loan, the lender agrees to reduce the amount to ₹2 lakh over 36 months at 7%. What happens to the EMI?

AIt falls to zero

BIt falls to about ₹6,175, which is real relief in present-value terms

CIt stays at ₹9,263

DIt rises because of the haircut

Q39 MCQ · 1 mark MediumRepayment schedule

Which Excel functions split an EMI into its principal and interest parts?

APPMT for principal and IPMT for interest

BSUM for principal and AVERAGE for interest

CNPV for principal and IRR for interest

DFV for principal and PV for interest

Q40 MCQ · 1 mark HardRepayment schedule

A ₹10 lakh loan at 7% for 10 years has an EMI of about ₹11,610. How much of the first EMI is interest?

AAbout ₹7,000

BAbout ₹5,777

CAbout ₹5,833

DAbout ₹11,610

Q41 MCQ · 1 mark MediumRepayment schedule

On the same loan, what happens to the first EMI's split if the rate is 9% instead of 7%?

AMore goes to principal

BMore goes to interest (about ₹7,500) and less to principal

CAll of it goes to principal

DThe split is unchanged

Q42 MCQ · 1 mark MediumEvaluating loans

Why is a loan linked to an external benchmark like the repo rate considered more transparent?

ARate changes pass through quickly and openly

BIt needs no credit check

CIts rate never changes

DIt always has a lower rate

Q43 MCQ · 1 mark MediumEvaluating loans

Besides the interest rate, which cost should a borrower check when comparing loans?

AThe colour of the passbook

BThe bank's share price

CProcessing, legal and other upfront charges

DThe branch's opening hours

Q44 MCQ · 1 mark MediumEMI vs tenure

When floating rates rise, why do many borrowers prefer to extend the tenure rather than raise the EMI?

AA higher EMI lowers the credit score

BExtending tenure reduces total interest

CBanks forbid EMI changes

DThe EMI was chosen to fit their budget, and a higher EMI could strain finances

Q45 MCQ · 1 mark MediumInvest or repay

A client has a lump sum and a credit card balance at 40% interest. What is usually best?

AKeep the money in a savings account

BInvest in a fixed deposit at 7%

CPay off the credit card balance

DInvest in equity expecting 12%

Q46 MCQ · 1 mark MediumInvest or repay

A home loan costs 7% and the client expects about 12% long-term from equity. What should the adviser weigh before suggesting investing instead of prepaying?

AOnly the tax on the home loan

BOnly the bank's preference

CNothing, equity always wins

DThe extra risk in equity versus the certain saving from prepayment

Q47 MCQ · 1 mark EasyDebt reduction

In the avalanche method of debt repayment, which loan is paid first?

AThe loan with the highest interest rate

BThe loan with the largest balance

CThe loan with the smallest balance

DThe loan with the lowest interest rate

Q48 MCQ · 1 mark MediumDebt reduction

What is the main appeal of the snowball method?

AIt pays the highest-rate loan first

BMotivation from clearing small loans quickly

CIt always minimises total interest

DIt requires no budgeting

Q49 MCQ · 1 mark HardDebt reduction

Which method starts by clearing the smallest debt and then switches to the highest-rate debt?

ASnowball

BAvalanche

CAmortisation

DBlizzard

Want more practice? These 49 questions cover the whole chapter. Take a free full-length X-A mock in the real exam pattern to test every chapter together.
Start free X-A mock exam →

Case-Based Questions (1 set)

Case 1 Case-Based · 2 marks each Debt servicing and repayment strategy

Meera earns ₹1,00,000 a month. Her debts are: a credit card balance of ₹40,000 at 3% a month (she pays only the minimum), a personal loan of ₹1.5 lakh at 18% a year (EMI ₹7,500), a car loan of ₹2 lakh at 10% (EMI ₹6,500), and a home loan of ₹25 lakh at 8% (EMI ₹23,000). She has just received a bonus of ₹60,000 and asks her adviser how to use it and whether her debt level is reasonable.

Easy Sub-question 1

Ignoring the credit card minimum payment, what is Meera's debt servicing ratio from her three EMIs?

A37%

B23%

C30%

D45%

Medium Sub-question 2

Using the avalanche method, which debt should the bonus go to first?

AThe personal loan

BThe credit card balance

CThe home loan

DThe car loan

Medium Sub-question 3

Under the snowball method, what would be the order of repayment?

APersonal loan, credit card, car loan, home loan

BHome loan, car loan, personal loan, credit card

CCar loan, personal loan, credit card, home loan

DCredit card, personal loan, car loan, home loan

Medium Sub-question 4

Why should Meera not prioritise prepaying the home loan with the bonus?

AHome loans cannot be prepaid

BPrepaying lowers her credit score

CIt is her cheapest debt and is secured, while costlier unsecured debts remain

DBanks charge heavy prepayment penalties on home loans

About this content: These practice questions are based on the NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination Workbook published by the National Institute of Securities Markets (NISM), Mumbai. NISM is a SEBI-established institution. Questions cover Debt Management and Loans with verified answers and explanations. BullWiser is an independent exam preparation platform — not affiliated with NISM or SEBI. Last updated: October 02, 2026.

Ready to Test Yourself Under Exam Conditions?

Full 180-minute mock exam with all 20 chapters, mixed-weight case-based questions, negative marking, and NISM-accurate 60% pass threshold.

Start Full Mock Exam ▶

✓ Unlock the 8 full mocks (₹199), pass the real NISM exam, and get your ₹199 back in your UPI. Conditions apply

← Ch.3: Cash Flow Management and Budgeting Ch.5: Introduction to Indian Financial Markets →