Be discrete with your Diwali shopping, avoid debt traps

Adhil ShettyBankbazaar.comIt is that time of the year when retailers and manufacturers want you to ‘shop till you drop’. With this in mind, they bring forth a plethora of schemes to attract as many buyers as they can to make up for all the other lukewarm sales seasons. Shopping is always addictive, and with new-age shopping experiences like online portals, mobile wallets, credit cards, and instant loans, shopping has become even more convenient and “affordable”.As one offer leads to another, many people botch up their finances unknowingly during festive seasons.Credit cards, consumer loans, and debt trapsLet’s take an example to see how over-indulgence can complicate your finances. Say you earn a monthly salary of Rs. 50,000. You plan to buy the latest iPhone mobile handset, which may set you back by around Rs. 90,000.You are offered an option to pay back this amount in 12 EMIs. The bank charges you 12% interest, so you pay an EMI of Rs 7,996 every month for the next one year. Add to this the 2% processing fee of Rs. 1,800. Finally, you end up paying Rs. 97,752 (7996*12 + 1800), thus negating the impact of the discount that the retailer may be giving you.It is very likely that this is not the only EMI you may be paying. You may already have a car loan, a home loan, or other EMIs on your earlier purchases. The next month you may realize that 60-70% of your salary is being used for paying loans.In case you happen to miss one of the EMIs, or credit card bills, you are in deep trouble—especially in case of the latter. Credit card dues, if not paid in full on time, can cause considerable damage to not only your finances but also your credit standing. Banks levy interest as high as 36-40% on the outstanding amount.Such misses can cost you dearly, as high interest rates may lead to mounting debt and bad credit rating—a blot that may take at least three years to clear. A bad credit rating also means that banks may reduce your credit limit on credit cards and reject your loan application.In such a situation, if you have an emergency in your family, you can neither take a personal loan nor avail the full credit limit of your credit card. You may have shut the doors on accessing credit from banks by spending indiscreetly.Avoid getting into the shopping trapOne way to stop buying unnecessary things during this festive season is to make a list of things that you actually plan on buying. Then, prioritize your list based on your necessity. Before shopping, assess your finances. See how much you can afford to pay in cash and buy on credit. While buying, always keep your financial limitations in mind. Remember, credit limits are likely much more than your monthly salary. Therefore, do not take it as a benchmark for your spending decisions.Once you are done buying things on cash (or debit card), ask yourself what items you need to buy on credit. If some of the things in the list can be bought later, try postponing the purchase.Do your best to avoid purchasing items not in the list. Even for items that you do need, look around for the best bargains. How to get out of the debt trapThe first step to make sure you do not fall into a debt trap is to know exactly how you are placed in terms of your income and expense. Many people fail to do this, and by the time they realize their financial position, they are already trapped neck-deep in debt. Checking your income-expense ratio is a time-tested way of knowing your financial standing. If more than 50% of your income goes into paying EMIs, it is cause for concern.The next step to come out of a debt trap is to cut your expenses intelligently and plan your finances carefully. Depending upon the seriousness of your debts, steps like closing out costly loans, prioritized repayment of ballooning debts, consolidating all small loans, asking the bank for relaxed payments or step-up payments, etc., can be planned. There is no single roadmap to escape a debt trap.Try repaying the high-interest debts first and, if possible, borrow at cheaper rates. However, banks would be skeptical of providing loans to a borrower already in a debt trap. Also, if not planned well, new loans would only add to your problems, worsening the situation.Finally, debt-counseling centers can also help.A little discretion in your festive shopping can help ensure your financial prosperity and well-being.