Culture of Instalments

Let me share a data from National Sample Survey Organisation (NSSO) revealing that Indians are now deeper in debt than ever before – average debt per household in rural areas has increased by over 330 per cent in the past 15 years, while urban areas have witnessed a 620 per cent rise. Before explaining the reasons of this deeper debt story, it is an opportune time to first have a look at the modern population mix of societies which are now more inclined to live a life basically beyond their capacity. 

Our social set-up has undergone a sea change. In fact, it continues to gladly fall in line with the changing times. Whatever the nature of changes taking place around us, there is a common force which drives these changes to the grass root level. This common force has its might in finances. In other words, finance is the lone element fuelling today’s social change; of course, for betterment. 

   

So availability of finance in the modern times holds key to witness living standard of societies getting modernized.  But when it comes to availability of finance, the resources for larger part of the societies were  scarce till banks and financial institutions liberalized lending policies. This paved way for almost all segments of populations to avail loan facilities irrespective of their economic status. 

Today, even for an ordinary person buying anything on a loan has made their life easy.  Precisely, living on a bank loan or more precisely on equated monthly instalments (EMIs) has become a priority for almost all families if not every individual. The kind of fast growing consumerism coupled with emerging sea of personal needs has forced almost all segments of populations, especially the young generation to live their life on EMI. 

In other words, loans have now been shaping the way of life to realize growing aspirations as everything is available on EMI. Now people think EMI, eat EMI and breathe EMI. However, if this EMI is loaded with comfort of owning an asset, it’s equally as bad as a termite that eats your financial comfort. 

Basically, you have to understand that affording a loan is different from EMI affordability. You may be able to afford an EMI for a few months or some years but not the actual Loan. For paying an EMI on long term basis, you are ignoring future needs.  You may consider increase in your future income, but then inflation will also rise and there would be other added expenses simply adding to your financial burden. One more thing is that you may afford higher EMI today, but this way you would be having lesser chances of savings for your future. Needless to mention that over a period of time you would be loaded with more responsibilities in life and to shoulder them savings for future is inevitable. 

You must understand that when you purchase something on EMI, it may be for immediate gains, but at the end you pay for a period of prolonged pain. These EMIs, of course, help you to have goods that you might not have been able to otherwise afford – from kitchen appliances and washing machines, to luxurious cars and high-end electronic gadgets, including smartphones, tablets and LED TVs, etc. But these  consumer goods are essentially depreciating assets and you are paying more for something that is fast losing its value, and paying more for it over the long run.

So while opting for loans, it always necessary to look beyond the initial years and calculate the potential impact, those EMI payments will have on your future financial life. It is just a matter of good financial planning.

Meanwhile, let me share some important tips which you should follow while obtaining a bank loan. Ensure total EMI of your loans remains below 40 per cent of your take home salary. Examples galore which suggest that anything outside this range puts a borrower into a debt trap. Don’t get lured to small/affordable EMIs. Always remember that your monthly budget and cash flow position is always changeable under the circumstances of repaying a bank loan. Check you net income (inflow) and expenditure (outflow) and the difference between the two will give you the quantum of your cash reserve. This cash reserve figure is the actual empowerment you possess to decide the amount of loan you can obtain and repay without any default.

Precisely, the power of a bank loan has two sides. It can either bring prosperity to you or leave you in a debt trap.

(The views are of the author and not that of the institution he works for)

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