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Reading the first month of a loan

Series X-A case study · set 1, case 3 of 9 · 5 questions · 1 mark each

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Question 1 of 5Case practice

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Ravi has a loan balance of ₹6,00,000 immediately before this month’s interest is charged. The quoted annual rate is 12%, charged monthly at 1% of the opening balance. His monthly instalment is ₹20,000, paid after interest is added. His take-home income is ₹80,000 and his other monthly EMI is ₹8,000. There are no fees, overdue amounts or penalties. He may make an additional ₹50,000 principal payment immediately after this instalment. The lender confirms that the extra amount reduces principal immediately and does not replace any future instalment. Compare the alternatives using the same interest rate and timing.

All people, firms, prices and contract terms are fictional.

Ignore taxes and transaction costs unless the case explicitly includes them.

Case 3 · Q1 of 51 markXA-S1-C03-Q1

What is this month’s interest on the ₹6,00,000 loan?

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The case and its answers

Every question of this case, with its answer and why each other option is wrong.

Ravi has a loan balance of ₹6,00,000 immediately before this month’s interest is charged. The quoted annual rate is 12%, charged monthly at 1% of the opening balance. His monthly instalment is ₹20,000, paid after interest is added. His take-home income is ₹80,000 and his other monthly EMI is ₹8,000. There are no fees, overdue amounts or penalties. He may make an additional ₹50,000 principal payment immediately after this instalment. The lender confirms that the extra amount reduces principal immediately and does not replace any future instalment. Compare the alternatives using the same interest rate and timing.

All people, firms, prices and contract terms are fictional.

Ignore taxes and transaction costs unless the case explicitly includes them.

  1. Q1What is this month’s interest on the ₹6,00,000 loan?

    • Option A. ₹6,000 — Correct answer

    • Option B. ₹72,000

      Why it is wrong: This is annual interest at the initial balance, not one month.

    • Option C. ₹20,000

      Why it is wrong: The full instalment is not interest.

    • Option D. ₹5,800

      Why it is wrong: This incorrectly charges interest after deducting the instalment.

    Answer: A. ₹6,00,000 × 1% = ₹6,000. Remember: Reducing-balance loan interest depends on the period’s opening balance.

    Hint, shown before you answer in practice mode: Use the monthly rate on the opening principal.

    XA-S1-C03-Q1easynumerical

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  2. Q2How much principal does the regular ₹20,000 instalment repay this month?

    • Option A. ₹26,000

      Why it is wrong: This adds interest instead of deducting it.

    • Option B. ₹20,000

      Why it is wrong: This ignores interest included in the payment.

    • Option C. ₹14,000 — Correct answer

    • Option D. ₹6,000

      Why it is wrong: This is the interest portion.

    Answer: C. Principal repaid = ₹20,000 − ₹6,000 = ₹14,000. Remember: An EMI pays both interest and principal.

    Hint, shown before you answer in practice mode: Separate interest from the instalment.

    XA-S1-C03-Q2mediumnumerical

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  3. Q3Without the extra payment, what balance carries into next month?

    • Option A. ₹5,86,000 — Correct answer

    • Option B. ₹5,80,000

      Why it is wrong: This subtracts the full payment directly from principal.

    • Option C. ₹6,06,000

      Why it is wrong: This ignores the instalment.

    • Option D. ₹5,94,000

      Why it is wrong: This subtracts interest rather than the principal repayment.

    Answer: A. ₹6,00,000 + ₹6,000 − ₹20,000 = ₹5,86,000. Remember: A loan schedule follows the order in which interest and payments occur.

    Hint, shown before you answer in practice mode: Add interest and then subtract the instalment.

    XA-S1-C03-Q3mediumnumerical

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  4. Q4What share of take-home income goes to both regular EMIs?

    • Option A. 25%

      Why it is wrong: This includes only the ₹20,000 instalment.

    • Option B. 35% — Correct answer

    • Option C. 10%

      Why it is wrong: This includes only the other EMI.

    • Option D. 45%

      Why it is wrong: This overstates the total EMI amount.

    Answer: B. (₹20,000 + ₹8,000) ÷ ₹80,000 × 100 = 35%. This is a case ratio, not a regulatory maximum. Remember: Debt-service ratios should use a clearly defined income base.

    Hint, shown before you answer in practice mode: Add the regular instalments, then divide by income.

    XA-S1-C03-Q4mediumnumerical

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  5. Q5If Ravi makes the extra ₹50,000 payment, by how much does next month’s interest fall versus not making it?

    • Option A. ₹50,000

      Why it is wrong: This is principal repaid, not interest saved for one month.

    • Option B. ₹5,000

      Why it is wrong: This applies a 10% monthly rate.

    • Option C. ₹6,000

      Why it is wrong: This is the previous month’s total interest.

    • Option D. ₹500 — Correct answer

    Answer: D. ₹50,000 × 1% = ₹500 less interest next month. The remaining balance after the extra payment is ₹5,36,000. Remember: Prepayment savings begin with interest avoided on principal removed.

    Hint, shown before you answer in practice mode: Only the extra principal reduction changes the next month’s interest.

    XA-S1-C03-Q5mediumnumerical

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