Easy access to credit can put you in a debt trap: How to avoid falling into one

Whether you are planning a dream holiday or gearing up for festive shopping, we are bombarded with ads everywhere offering instant loans, promising cash in your bank in minutes. With digital lending taking off, getting a short-term loan has indeed become a matter of minutes.

India’s digital lending stood at $ 75 billion in FY18 and is estimated to reach $1 trillion in the next five years.

A report by digital lending platform CashE states 23% millennials take loans to pay their EMIs back, while 22% borrow for shopping. And most of them want loans that can be repaid within a month or less.

“Earlier people would go for personal loans of day 2 lakh and then go purchase things. Now trends are changing - people go to Flipkart and purchase something worth 25k by taking loan from platform like ours, or to MakeMyTrip, plan vacation worth 50k and take loan from platform like us,” Bhavin Patel, co-founder & CEO Lenden Club says.

There are many of us who are tempted to avail these instant personal loans. Are we all falling into a trap?

Short-term loans often come with high interest rates. On some platforms, it could go up to as high as 20%. When broken down as EMIs, they may like a smaller monthly amount, but poor planning could lead to you staring at a huge pile of debt.

“Dont take loan for day to day expenses. Take the loan for emergencies or some event is happening. It is important for customers not to know that just because credit is available to not fall into that trap and clearly understand their payment capability, their monthly cashflow and future what their income will be,” Ajit Kumar, Founder & CEO, RupeeCircle

Experts we spoke to say that while there is no thumb rule for how much debt you should have, one should avoid borrowing beyond 50% of your income. So, before you borrow, think. Can the expense be postponed? Plan your savings better. If you are taking a loan, make sure you know what interest rate you will be charged. Think of what EMIs you will be paying and ensure you have the right cashflow to pay them.  

“Loans are available to increase facilities for your life - but when you have something available - it should be used in a controlled manner. So, if you go out of control, that hampers you. Like If you drive your car on a high speed, you are likely to get into an accident. Similarly this creates a hampering situation in your life. If you go and overburden your life with more and more EMIs, you are going to face challenge in your personal life, financial life and it will overall affect your family life,” Bhavin says.

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