CBSE Class 10 · Money and Credit

Credit Class 10: Two Credit Situations and Terms of Credit

Updated 14 October 2026 · Fact-checked

Credit is an agreement in which the lender supplies money, goods or services in return for a promise of future payment. It can raise earnings, as for shoemaker Salim, or push a borrower into a debt trap, as for farmer Swapna after crop failure. Terms of credit are the interest rate, collateral, documentation requirements and mode of repayment.

Same tool, different results: credit helped Salim, but after crop failure with no support it pushed Swapna into a debt trap.

Illustration drawn for QuestionBuddy.

Understand Credit: Situations and Terms of Credit

What credit is. Many daily transactions involve credit. Credit (loan) is an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

Situation 1: Salim (credit helps). Two months before the festival season, shoe manufacturer Salim gets an order for 3,000 pairs of shoes, to be delivered in a month. He needs more workers and raw materials. He borrows in two ways: the leather supplier gives leather now to be paid later, and the large trader gives a cash advance for 1,000 pairs. Salim delivers on time, makes a good profit and repays. Credit met his working capital needs, helped him finish production on time and increased his earnings: a vital and positive role.

Situation 2: Swapna (debt trap). Swapna, a small farmer, grows groundnut on three acres and borrows from a moneylender for cultivation. Pests destroy the crop despite expensive pesticides; she cannot repay, and the debt grows. Next year she takes a fresh loan; the crop is normal, but earnings cannot cover the old loan. She has to sell part of her land. Credit left her worse off: this is a debt trap, a situation from which recovery is very painful.

The lesson. Whether credit helps or harms depends on the risks in the situation and whether there is some support in case of loss. In rural areas the main demand for credit is for crop production; there are three to four months between buying inputs and selling the crop, so farmers take crop loans at the start of the season and repay after harvest. Repayment depends crucially on farm income, which is why crop failure is so dangerous.

Terms of credit.
1. Interest rate: every loan specifies the interest the borrower pays along with the principal.
2. Collateral: an asset the borrower owns (land, building, vehicle, livestock, bank deposits) used as a guarantee until the loan is repaid; if the borrower fails to repay, the lender may sell the collateral.
3. Documentation requirements: papers the lender asks for.
4. Mode of repayment: how and when the loan is repaid.
Together these form the terms of credit, which vary substantially with the nature of the lender and borrower. Borrowers look for easy terms: low interest, easy repayment, less collateral and documentation.

Megha's house loan (NCERT). Megha borrows Rs 5 lakh from a bank to buy a house at 12 per cent annual interest, repayable over 10 years in monthly instalments. She submits documents showing her employment and salary; the bank keeps the papers of the new house as collateral until she repays fully.

Varied terms in Sonpur (NCERT). Shyamal (1.5 acres) once borrowed from a moneylender at 5 per cent a month (60 per cent a year) and now from a trader at 3 per cent a month, but must sell his crop to the trader, who buys cheap after harvest. Arun (7 acres) gets a bank loan at 8.5 per cent a year, repayable within three years, and can get a fresh loan against a cold storage receipt. Rama, a landless labourer, borrows from her landowner at 5 per cent a month, repays by working for him, and keeps taking fresh loans; she owes Rs 5,000.

Credit: Situations and Terms of Credit: key facts

Credit (definition): Lender supplies money, goods or services now in return for the borrower's promise of future payment
Positive credit: Salim: working capital from leather supplier and trader's advance -> on-time production -> higher earnings
Debt trap: Swapna: crop failure -> cannot repay -> debt grows -> sells land; worse off than before; Depends on risk and support in case of loss.
Terms of credit: Interest rate + collateral + documentation + mode of repayment; Vary with lender and borrower.
Collateral: Asset of the borrower (land, building, vehicle, livestock, deposits) held as guarantee; lender can sell it on default
Megha's loan: Rs 5 lakh; 12% a year; 10 years; monthly instalments; salary documents; house papers as collateral
Sonpur rates: Moneylender 5%/month (60%/year); trader 3%/month + crop sale; bank 8.5%/year; landowner 5%/month

How to answer Credit: Situations and Terms of Credit questions

Economics in 2026-27 has 1-, 3- and 5-mark questions. This topic is tested through definitions, Salim-Swapna comparisons, terms-of-credit tables and case passages on Megha or Sonpur borrowers.

1Define credit with 'promise of future payment'.
2For two situations, compare need, risk and outcome for Salim and Swapna.
3Explain debt trap with cause (risk, no support) and effect (selling assets).
4For terms of credit, list all four and explain collateral with examples.
5For a loan description, fill the terms: amount, duration, documents, interest, repayment, collateral.

Credit: Situations and Terms of Credit in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Reading the terms of credit

Suppose a shopkeeper takes a bank loan of Rs 2 lakh at 10 per cent a year, repayable in 24 monthly instalments. The bank asks for her shop's registration papers and income records, and keeps her fixed deposit receipt until the loan is repaid.

Identify the terms of credit in this imagined loan.

Try it first, then show the solutionSolution

Interest rate: 10 per cent a year.
Mode of repayment: 24 monthly instalments.
Documentation: registration papers and income records.
Collateral: fixed deposit receipt.

Answer: The interest rate is 10 per cent a year; the mode of repayment is 24 monthly instalments; the documentation is the shop's registration papers and income records; and the collateral is her fixed deposit, which the bank can use if she fails to repay. Together these make up the terms of credit, as in Megha's house loan.

Memory hook: I-C-D-R: Interest, Collateral, Documents, Repayment.

Tricks to remember Credit: Situations and Terms of Credit

Short memory aids. Say each one aloud once, then use it on a question the same day.

Salim smiles, Swapna sinks
Same tool (credit), different results: profit for Salim, debt trap for Swapna.
Use it when: Two credit situations.
I-C-D-R
Interest, Collateral, Documentation, Repayment: the four terms of credit.
Use it when: Terms of credit.
5 per month = 60 per year
Moneylender's 5 per cent a month is 60 per cent a year.
Use it when: Comparing costs.

Credit: Situations and Terms of Credit: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Collateral · 1 mark · MCQBoard level

Collateral refers to:
(a) the interest charged on a loan
(b) an asset of the borrower used as a guarantee until the loan is repaid
(c) the time allowed to repay a loan
(d) the documents of employment

Try it first, then show the solutionSolution

NCERT: an asset the borrower owns, used as guarantee to the lender (1 mark).

Answer: (b) an asset of the borrower used as a guarantee until the loan is repaid

Example 2: Salim vs Swapna (3 marks) · 3 marks · Short answerBoard level

Compare the credit situations of Salim and Swapna under: why they needed credit, the risk, and the outcome. (3 marks)

Try it first, then show the solutionSolution

Need: Salim needed working capital to complete a large shoe order; Swapna needed money for groundnut cultivation (1 mark).
Risk: Salim's risk was low, with an assured order; Swapna's crop could fail, and it did, due to pests (1 mark).
Outcome: Salim repaid with good profit and earned more; Swapna fell into a debt trap and sold part of her land (1 mark).

Answer: Salim needed credit as working capital to complete an order for 3,000 pairs of shoes; Swapna needed it for cultivation costs. Salim's order was assured, but Swapna's crop was exposed to pests and failed. Salim repaid with a good profit, while Swapna could not repay, fell into a debt trap and had to sell part of her land.

Example 3: Assertion-reason: risk · 1 mark · Assertion-reasonHarder board level

Assertion (A): In situations with high risk, credit might create further problems for the borrower.
Reason (R): If the venture fails, the borrower may be unable to repay and may have to sell assets, as Swapna sold her land.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

Failure in a risky venture makes repayment impossible and leads to a debt trap; R explains A (1 mark).

Answer: (a) Both A and R are true, and R is the correct explanation of A.

Example 4: Passage: Megha's house loan (3 marks) · 3 marks · Short answerHOTS / competency

Read and answer. Megha has taken a loan of Rs 5 lakh from a bank to buy a house. The annual interest rate is 12 per cent and the loan is to be repaid in 10 years in monthly instalments. She had to submit documents showing her employment records and salary. The bank kept the papers of the new house as collateral, to be returned when she repays the entire loan with interest. (a) What is the collateral? (b) What is the mode of repayment? (c) Why does the bank ask for both documents and collateral? (3 marks)

Try it first, then show the solutionSolution

(a) The papers of the new house (1 mark).
(b) Monthly instalments over 10 years (1 mark).
(c) Documents show she can repay from a regular salary; collateral lets the bank sell the asset if she fails to repay (1 mark).

Answer: (a) The papers of the new house. (b) Monthly instalments over 10 years. (c) Salary and employment documents show the bank that she has a regular income to repay, and the house papers act as a guarantee: if she defaults, the bank has the right to sell the asset to recover its money.

Example 5: Role of credit (5 marks) · 5 marks · Long answerHarder board level

'Credit can have a positive impact, or in certain situations make the borrower worse off.' Examine the statement with examples, and state what decides which outcome occurs. (5 marks)

Try it first, then show the solutionSolution

Credit is an agreement to supply money, goods or services against a promise of future payment (1 mark).
Positive: Salim used supplier credit and a trader's advance to meet working capital, completed his order on time and earned a good profit (1 mark).
Negative: Swapna's groundnut crop failed due to pests; she could not repay, debt grew, and she sold part of her land: a debt trap (1 mark).
Rural repayment depends on farm income, with three to four months between buying inputs and selling crops, so crop failure is dangerous (1 mark).
The outcome depends on the risks in the situation and whether there is support in case of loss; high-cost informal loans add to the risk (1 mark).

Answer: Credit is an agreement in which a lender supplies money, goods or services in return for a promise of future payment. It can help: Salim, a shoemaker, got leather on credit and an advance from a trader, finished a 3,000-pair order on time, repaid and earned more. It can also harm: Swapna borrowed from a moneylender for groundnut cultivation, pests destroyed her crop, the debt grew, and she had to sell part of her land, falling into a debt trap. Farmers repay only after harvest, three to four months after buying inputs, so crop failure is especially dangerous. Whether credit helps depends on the risks involved and on whether there is support in case of loss.

Example 6: Sonpur borrowers (3 marks) · 3 marks · Short answerHOTS / competency

Compare the terms of credit for Shyamal, Arun and Rama in Sonpur. Who is best placed and why? (3 marks)

Try it first, then show the solutionSolution

Shyamal: trader at 3 per cent a month, must sell his crop to the trader at low post-harvest prices (earlier moneylender at 5 per cent a month) (1 mark).
Rama: landowner at 5 per cent a month, repays by working, keeps taking fresh loans; debt of Rs 5,000 rising (1 mark).
Arun: bank loan at 8.5 per cent a year, repayable within three years, can borrow against cold storage receipts; best placed because his credit is cheapest and most flexible (1 mark).

Answer: Shyamal borrows from a trader at 3 per cent a month and must sell his crop to him at low post-harvest prices. Rama borrows from her landowner at 5 per cent a month, repays with labour and keeps taking new loans, so her debt grows. Arun gets a bank loan at 8.5 per cent a year, repayable within three years, and can borrow against cold storage receipts. Arun is best placed because his credit is far cheaper and more flexible.

Where students lose marks in Credit: Situations and Terms of Credit

The slips examiners see most often, and what to write instead.

Mistake: Defining credit as 'money given free'
Missing the promise of repayment.
Wrong working
Credit is money given to people who need it.
Right working
Money, goods or services supplied now in return for a promise of future payment.
Do this: Include 'promise of future payment'.
Usually costs: 1 mark.
Mistake: Listing only interest as a term
Other terms forgotten.
Wrong working
Terms of credit means the interest rate.
Right working
Interest, collateral, documentation and mode of repayment.
Do this: I-C-D-R.
Usually costs: 1-2 marks.
Mistake: Blaming Swapna alone
Ignoring risk.
Wrong working
Swapna failed because she did not work hard.
Right working
Pests destroyed the crop; risk without support led to a debt trap.
Do this: Focus on risk and support.
Usually costs: 1 mark.
Mistake: Confusing monthly and annual rates
Different units.
Wrong working
The moneylender's 5 per cent is cheaper than the bank's 8.5 per cent.
Right working
5 per cent a month is 60 per cent a year, far higher than 8.5 per cent a year.
Do this: Convert to the same unit.
Usually costs: 1 mark.

Exam tips

Use the Salim-Swapna table (need, risk, outcome) for any 3-mark comparison.
Convert monthly interest to annual before comparing lenders.
Learn Megha's loan terms; case questions use them.
Economics in 2026-27 has 1-, 3- and 5-mark questions.

Practice questions on Credit: Situations and Terms of Credit

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Which of the following is NOT one of the terms of credit?
(a) Interest rate
(b) Collateral
(c) Mode of repayment
(d) Double coincidence of wants
Hint
That belongs to barter.
Answer
(d) Double coincidence of wants
Q2 · 3 marks · Short answerBoard level
What is a debt trap? Explain with NCERT's example. (3 marks)
Hint
Swapna.
Answer
A debt trap is when credit pushes a borrower into a situation from which recovery is very painful. Swapna borrowed for groundnut cultivation; pests destroyed the crop and she could not repay, so the debt grew. Next year's normal crop could not cover the old loan, and she had to sell part of her land. Credit left her worse off.
Q3 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Lenders ask for collateral while lending.
Reason (R): If the borrower fails to repay, the lender has the right to sell the collateral to obtain payment.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Purpose of collateral.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q4 · 3 marks · Short answerHOTS / competency
Suppose Salim keeps getting orders from traders for six years. Predict his position, and say what could change it. (3 marks)
Hint
Credit for working capital; risk.
Answer
If orders keep coming, credit for working capital lets him finish orders on time, repay, and earn profits each time, so his earnings and business would grow over six years. His position could change if an order were cancelled or a buyer failed to pay, raising risk; then, without support, he too could struggle to repay.
Q5 · 3 marks · Short answerHOTS / competency
Given that many people in India are poor, how does this affect their capacity to borrow on good terms? (3 marks)
Hint
Collateral and documents.
Answer
Banks usually need documents and collateral such as land or deposits. Many poor people lack such assets and formal records, so they cannot get cheap bank loans. They then depend on informal lenders who charge very high interest, as Rama pays 5 per cent a month, which reduces their income and can lead to a debt trap.
Q6 · 5 marks · Long answerHOTS / competency
'Repayment of the loan is crucially dependent on the income from farming.' Analyse this with reference to rural credit and suggest one way to reduce the risk. (5 marks)
Hint
Crop cycle; Swapna; support in case of loss; cheaper credit.
Answer
In rural areas the main demand for credit is for crop production, which needs seeds, fertilisers, pesticides, water, electricity and repairs. There are three to four months between buying these inputs and selling the crop, so farmers borrow at the start of the season and repay after harvest from crop income. If the crop fails, as Swapna's groundnut did because of pests, repayment becomes impossible; debt grows, and the farmer may have to sell land. High interest from moneylenders adds to the burden. Whether credit helps depends on risk and on support in case of loss, so cheaper formal credit, like Arun's bank loan at 8.5 per cent a year, and support during crop failure reduce the danger.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.How many pairs of shoes did Salim have to deliver?Show answer
3,000 pairs.
2.What crop did Swapna grow?Show answer
Groundnut, on three acres.
3.What was the interest rate on Megha's loan?Show answer
12 per cent a year.
4.What was Arun's bank loan interest rate?Show answer
8.5 per cent per annum.
5.How long is the gap between buying inputs and selling crops?Show answer
Three to four months.

Credit: Situations and Terms of Credit: frequently asked questions

What is credit in Class 10 Economics?

An agreement in which a lender supplies money, goods or services to a borrower in return for a promise of future payment.

What are the terms of credit?

Interest rate, collateral, documentation requirements and the mode of repayment.

What is a debt trap?

When a borrower cannot repay and the debt keeps growing, forcing them to sell assets, as Swapna sold her land.

What is collateral?

An asset such as land, a building, livestock or bank deposits that a borrower pledges as a guarantee until the loan is repaid.