Question

Mohan is an agricultural labourer. There are several months in a year when he has no work and
needs credit to meet his daily expenses. He depends upon his employer, the landowner for credit
who charges an interest rate of 5 per cent per month. Mohan repays the money by working
physically for the landowner on his farmland.
Over the years his debt will –a)Increase - because of increasing interest and non-payment of monthly amount
b)Remain constant - as he is working for the employer but is repaying less
c)Reduce - as amount equivalent to his salary is being counted as monthly repayment
d)Be totally repaid - as he is repaying the debt in the form of physical labour​

Answer 1

Answer:

Answer will be A - Increase because of increasing interest and non payment of monthly amount

Answer 2

Over the years Mohan's debt will increase because of increasing interest and non-payment of monthly amount (option a).

This will happen because:

• For every loan, Mohan is charged a 5% rate of interest per month by the landowner.
• Let us consider that Mohan takes a loan of Rs. 100 in a month to meet his daily expenses.
• The rate of interest applicable is 5% for 1 month.
• Therefore it will be 100 + 5% = Rs. 5 per month and Total payment = Rs 105
• Then for 12 months, it would be 12 × Rs 5 = Rs 60 and Total payment = Rs 160
• Hence, the repay amount increases subsequently.
• Moreover, Mohan is taking loans from an unauthorised source that charges a higher rate of interest without any legal procedure.
• Also by working as a physical labourer he won't be able to repay his complete loans.
• Hence, Mohan's debt will keep increasing until he repays the loan.