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A one-year loan of ₹1,00,000 carries an agreed annual interest rate of 12%. The agreement reduces the…

The 10% rate is an agreed discount for repayment within six months. The ordinary 12% rate applies if the borrower does not qualify for the discount. Section 74 of the Indian…

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A one-year loan of ₹1,00,000 carries an agreed annual interest rate of 12%. The agreement reduces the annual rate to 10% if the borrower repays within six months. On these facts, how should the reduced-rate provision be characterised?

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Answer and explanation

Correct answer C

The 10% rate is an agreed discount for repayment within six months. The ordinary 12% rate applies if the borrower does not qualify for the discount.

Section 74 of the Indian Contract Act, 1872 concerns stipulations by way of penalty on breach. No breach occurs merely because the borrower chooses to repay on the agreed one-year schedule.

Option feedback

Option A

The lower rate rewards early payment. It is not triggered by breach of the one-year repayment term.

Option B

The stated rates apply in different, clearly specified circumstances.

Option C

The provision offers a reduced rate if the borrower repays before the ordinary due date.

Option D

The reduction itself gives no ground for the lender to avoid the agreed term.

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