Debt Management and Loans for NISM certification
Debt is a tool: used well, it buys a home years earlier or funds an education that raises income; used badly, it traps a family in EMIs and credit card interest. An adviser must judge how much debt a household can carry, which loans suit which purposes, how loan terms work, and how to get out of debt efficiently.
Advice & ResearchSeries X-A78 MCQs5 lessons18 flashcards3 memory tricks
Practise Debt Management and Loans free
What you'll learn
- Why borrow, and how much is too much
Explain when debt helps, and measure its burden with the debt-to-income ratio. - Finding money in the budget and handling windfalls
Plug budget leaks, use zero-base budgeting and decide what to do with a windfall. - Debt counselling: purpose, cost, maturity and rescheduling
Judge a loan by its purpose, cost and tenor, and help a stressed borrower. - Credit scores, secured and unsecured loans, and loan terms
Explain credit scores and the vocabulary of loans. - Loan calculations, restructuring and repayment strategies
Work out EMIs, split them into interest and principal, test restructuring offers and choose a debt-reduction strategy.
Key formulas
| Debt-to-income (DTI) | Monthly debt servicing ÷ monthly income |
|---|---|
| Example | ₹27,000 EMIs ÷ ₹60,000 income = 45%: too high |
Concepts explained
Debt-to-income ratio
Monthly debt servicing (principal and interest) as a share of monthly income: the main test of how much debt a household can carry.
What it means
- Lenders set their own limits; lower is always better.
- Above about 35–40% is excessive.
- A high DTI leaves no room for emergencies or new borrowing.
- Income ₹80,000
- EMIs ₹31,000 → ₹37,800
Answer: DTI rises from 38.75% to 47.25%
Revolving credit
Carrying part of a credit card bill forward; interest compounds monthly at very high rates.
What it means
- Cards are interest-free only when paid in full by the due date.
- Annual cost = (1 + monthly rate)^12 − 1.
- Clear card balances before any other debt.
- 1.03^12 − 1
Answer: 42.6% a year
Avalanche, snowball and blizzard
Three ways to order debt repayment: by highest rate, by smallest balance, or smallest first and then highest rate.
What it means
- Avalanche saves the most interest.
- Snowball builds momentum by clearing small loans and rolling EMIs forward.
- Blizzard combines the two.
- Card ₹40k at 40%
- Personal ₹2L at 16%
- Car ₹1.2L at 10%
- Home ₹18L at 8.5%
Answer: Avalanche: card, personal, car, home; snowball: card, car, personal, home
Mortgage, pledge, hypothecation
Ways a lender takes security: a mortgage on immovable property, a pledge of a movable asset held by the lender, hypothecation of a movable asset kept by the borrower.
What it means
- Home loan: mortgage.
- Gold loan or shares lodged with lender: pledge.
- Car loan: hypothecation; lender repossesses on default.
Memory tricks
Avalanche: highest rate first. Snowball: smallest balance first.
Pledge: lender holds the asset; hypothecation: borrower holds it.
No default during a moratorium, but interest keeps accruing.
Try 3 NISM-style questions
Q1. Why may spending on children's education be treated as investment-like?
- It is always tax-free
- It can raise the family's future earning power
- It creates a tradable asset
- It never needs to be budgeted or planned for in advance
Show answer
Answer: (2) It can raise the family's future earning power
Education can increase future income.
Q2. A ₹20 lakh loan at 8% for 15 years has an EMI of about ₹19,113. The interest in the first EMI is about
- ₹13,333
- ₹5,780
- ₹19,113
- ₹1,60,000
Show answer
Answer: (1) ₹13,333
20,00,000 × 8% ÷ 12 = ₹13,333; the rest (₹5,780) is principal.
Q3. In a restructuring, the lender agrees that only ₹3 lakh of a ₹4 lakh loan need be repaid over 3 years at 8%. The EMI falls to about ₹9,401. This is
- A tenor extension that keeps the same present value
- A moratorium on the loan
- A rate cut with the same principal
- A haircut that lowers the present value of repayments
Show answer
Answer: (4) A haircut that lowers the present value of repayments
Reducing the amount to be repaid is a real saving for the borrower.
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