Easy availability of loans and a little push from the lenders make many of us reckless in borrowing without much thought on the repayment ability.
Most of us avail of loans of some kind or the other, be it a home loan, a car loan or consumer finance loans to some big-ticket purchase beyond our financial ability. Even your credit card spend is a loan availed for a short duration which you need to pay in time to avoid spiraling interest burden.
However, easy availability of loans, including quick disbursal of personal loans and a little push from the lenders make many of us reckless in borrowing without much thought on the repayment ability. Deferring loan payment on a regular basis or juggling with loans can add to your long-term debt burden and could land you into a ‘debt trap’ from which you might find difficulty in extricating yourself.
But what are early indications of your sliding into a debt trap? “You should not have too many loans in your name such as a combination of home loan, personal loan and a top-up loan, There are instances in which individuals opt for personal loans to pay their rents or kid’s school fees. If you are forced to borrow to survive, you are almost in debt trap,” says Sushil Jain, National Head, Financial Planning, Bajaj Capital.
Jain points out that the debt trap starts when one fails to service his loans on time. “Most individuals do not take this situation seriously,” he said.
After one starts missing his loan repayment schedule, the logical thing to do for many is to draw some money from emergency fund. The next step towards dept trap is one’s emergency fund runs out. “Your emergency fund should be three times of your Monthly expenses. This is the first indication of the debt trap,” he said.
Adhil Shetty CEO and Co-founder Bankbazaar.com says the first sign of a debt problem is inability of pay off credit card dues. “Often, individuals pay the minimum balance on their credit cards. While this lets you get away by paying a small amount at one time, the debt will multiply over time. The interest rates on credit cards are very high at around 40 per cent, and the inability to pay off the bill is very expensive. If you cannot repay your bill by due date, you need to sit back and evaluate how you can clear such high-cost debt,” Shetty said.Amar Pandit, Founder & Chief Happiness Officer at HappynessFactory.in says the moment no bank is keen to offer you loan anymore, it is time to take a serious look at your debt. Besides this, he says some of the signals of an impending debt trap are:
- Inability or a stress on cash flows to pay your credit card bills, EMI’s etc.
- Paying one loan with another.
- Using credit card for paying basic expenses.
- Monthly expenses are exceeding monthly income.
- Dipping into your emergency corpus for general expenses.