Borrowing
Also written Personal borrowing
Taking money and paying it back over a period, usually through Equated Monthly Instalments, used to meet a financial goal when savings alone are not enough.
In plain language
Borrowing is what you do when your savings cannot cover a goal on their own. You take money now, from a bank or another lender, and pay it back over time.
The booklet's own description is that borrowing "provides the flexibility of repaying in small instalments over a period of time" — instead of needing the whole amount up front, you spread the cost. The most common repayment tool for this is the Equated Monthly Instalment (EMI), a fixed monthly payment that combines interest and a portion of the amount borrowed.
Borrowing is not free of judgement, though. Before lending, a bank assesses the borrower using the 5 Cs of credit, checks their credit score, and generally asks for collateral and a standard set of documents.
How it works
To apply for most loans, the booklet lists the documents a lender typically wants: proof of identity (passport, Aadhaar, driving licence, voter ID or PAN — any one), proof of residence (Aadhaar, a leave-and-licence agreement, or a utility bill not more than three months old), the latest three months' bank statement, salary slips for the last three months, two passport-size photographs, and collateral proofs where relevant.
Banks offer several distinct loan types for different purposes — personal, vehicle, education, gold, housing, agriculture and consumer durable loans — each covered separately elsewhere in the same chapter. Before sanctioning any of them, a bank weighs the 5 Cs of credit: Capacity, Character, Capital, Collateral and Conditions.
The booklet's seven "Tips to Avoid a Debt Trap" apply to borrowing generally: do not buy more than you can afford, a longer mortgage tenure does not mean you must take as long to repay, use credit cards to facilitate payment rather than to borrow, never treat a credit card as free money, cut activities that lead to debt, prefer a debit card to limit overspending, and spend within your means.
A worked example
Farhan wants to buy a scooter costing Rs 90,000 but has only Rs 30,000 saved. He borrows the remaining Rs 60,000 from a bank as a vehicle-purpose loan, to be repaid through EMIs over 24 months.
To apply, he submits his Aadhaar (identity and residence), his last three months' salary slips, his last three months' bank statement, and two photographs — exactly the document list Chapter 8 sets out. The bank checks his credit score before sanctioning the loan.
Each month Farhan pays a fixed EMI that covers both interest and a slice of the Rs 60,000 principal. Following the booklet's debt-trap tips, he resists an offer to extend his tenure to 48 months just because the bank allows it — a longer available tenure "does not necessarily mean we need to take as long to repay," and a longer term would cost him more in total interest for the same Rs 60,000 borrowed.
Why NISM asks about it
Chapter 8 (Borrowing-Related Products) opens with this general definition of borrowing before listing the specific loan types, the document requirements, the 5 Cs of credit and the debt-trap tips. Expect the exam to test the document list (identity, residence, three months' bank statement, three months' salary slips) and the meaning of EMI.
Common exam traps
- Three months recurs twice in the document list, for both the bank statement and the salary slips — a utility bill used as residence proof also cannot be more than three months old. Three separate "three month" rules, easy to blur into one.
- EMI combines interest and principal in one fixed payment — it is not interest-only.
- The 5 Cs assess the borrower before a loan is sanctioned; the debt-trap tips are for after the loan is taken, to manage repayment responsibly. Do not conflate the two lists.
- Do not treat "borrowing" and "debt" as identical terms — the booklet frames borrowing as the act, and debt as money borrowed to cover a shortfall; borrowing for a planned purchase and debt from unplanned overspending are treated with different tones in the same chapter.
Check yourself
1.According to the chapter, when does one resort to borrowing?
- a)Whenever a purchase is desired
- b)In meeting financial goals, when savings are inadequate
- c)Only for purchasing a house
- d)When investment returns are expected to exceed the interest rate
Show the answer
Answer: (b) In meeting financial goals, when savings are inadequate
"Borrowing is an act of taking money and paying it back over a period. In meeting financial goals, IN CASE THE SAVINGS ARE INADEQUATE, one resorts to borrowing. Borrowing provides the flexibility of REPAYING IN SMALL INSTALMENTS over a period of time. EQUATED MONTHLY INSTALMENTS (EMI) is a very popular mode of repayment of loan." Borrowing bridges a gap between a real goal and real savings — the same framing Chapter 2 used when it defined debt as "money borrowed to meet SHORTFALL of money when expenses are more than the funds available in hand." Option (a) is what the debt-trap tips warn against: "Do not buy more than what you can afford. Do not get lured into 'WANT' items." Option (d) is forbidden outright by Chapter 5's don'ts — "Don't borrow money for investment."
2.A shopkeeper considers offering his shop as collateral to obtain a lower rate on the family's borrowing. What should he weigh?
- a)Nothing — a lower rate is always better
- b)That on default the lender may seize the assets financed and the collateral, so pledging the asset that produces the household income would end the means of repaying everything else
- c)That collateral has no effect on the interest rate
- d)That a lien means he loses ownership immediately
Show the answer
Answer: (b) That on default the lender may seize the assets financed and the collateral, so pledging the asset that produces the household income would end the means of repaying everything else
Security genuinely lowers the rate, because it converts an uncertain recovery into a probable one. But the chapter states the consequence plainly: "If the borrower stops making the promised loan repayments, the lender can SEIZE THE ASSETS FINANCED AND THE COLLATERAL to cover its losses." Note the and — both. So the real question is not whether security is cheaper but which asset the family can afford to lose. Pledging the shop puts the source of repayment itself on the table: a bad year would then take the income and the asset together, turning a manageable difficulty into an unrecoverable one. Gold is the far better candidate, and the chapter lists a gold loan as "given only on providing gold as a security." Option (d) misstates a lien, which is "a lender's CLAIM to a borrower's collateral" — the borrower continues to own the asset subject to that claim, exactly as with Chapter 5's margin pledge.
3.Which statement about a personal loan is correct?
- a)It may be used only for medical emergencies
- b)It can be utilised for any purpose and requires no collateral security
- c)It requires gold as security
- d)It is available only to salaried employees
Show the answer
Answer: (b) It can be utilised for any purpose and requires no collateral security
"Personal Loan - This loan can be utilized for ANY PURPOSE, for example, paying debt, marriage expenses or vacation expenditure. NO COLLATERAL SECURITY IS REQUIRED for this type of loan." Those two features are also why it is the most expensive category of ordinary borrowing: the lender parts with money having nothing to seize and no idea what the money will do, and prices that risk into the interest rate. So "quick and no security needed" is a description of cost, not a discount. Option (c) describes the gold loan, which is "given only on providing gold as a security to a bank or any other lending institution." The practical rule that follows: if a purpose-specific loan exists for what you are doing — education, housing, vehicle, agriculture, consumer durable — using a personal loan instead means paying more for the same money.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- 5 Cs in creditThe five factors — Capacity, Character, Capital, Collateral and Conditions — a bank weighs when deciding whether to sanction a loan.
- CIBILIndia's first credit information company, licensed by the RBI, which collects lenders' monthly payment records to produce individuals' credit scores and Credit Information Reports.
- CollateralA property or other asset a borrower pledges as security for a loan, which the lender can seize if repayments stop; the lender's claim to it is called a lien.
- Credit cardA card that lets the holder pay using a lender's credit line rather than their own account balance, with interest charged if the outstanding amount is not paid on time.
- DebtMoney borrowed to cover a shortfall, when your expenses are more than the funds you actually have in hand — the booklet's own one-line definition.
- Agriculture loanA loan provided to farmers for farming operations such as horticulture and sericulture; a farmer who takes one is compulsorily brought under the Pradhan Mantri Fasal Bima Yojana crop insurance scheme.
- Housing loanA loan for construction, renovation, extension or purchase of property, whose principal qualifies for a Section 80C deduction and whose interest qualifies for a Section 24 deduction on loans taken after 1 April 1999.
- Education loanA loan for higher education, requiring an admission offer before it can be applied for, which can also be applied for through the government's Vidyalakshmi Portal using one common application form across multiple banks.