Borrowings have become easier now, but remember that instant loans can push you towards a debt trap. Do not let messages from lenders advertising attractive interest rates influence you into taking loans.
Many people today find themselves dangerously close to falling into a debt trap, not just because of bad planning but also because borrowing from fintech companies was easy. More and more millennials are taking multiple loans as access to loans has increased with the rise in the number of lending companies.
According to a recent report by CashE a digital lending company, in 2018, 23% salaried millennials took short-term personal loans to refinance individual EMIs and 14% borrowed to pay off their loans. The average frequency of repeat loans was 60 days. Data from CRIF High Mark, a Mumbai-based credit bureau, shows that 44% personal loans were disbursed in FY19 to people in the 26-35 age group, and 13% to those who were 25 or below. The number of personal loans disbursed grew at 25% compounded annual growth rate (CAGR), whereas the book size for personal loans grew by 37% over the last three to four years.
No further loans should be taken
The debt trap is created when new loans are taken to repay older loans. The repayment of a loan has to come from income. The husband in the story was reluctant to ask his wife to find a job, as he worried that she would be upset with the loans they had. Both partners should be aware of all income, expense, and they must also make all money de decisions together.
Place a Limit usage of Credit
Learning to live within means is not easy. Adopting a lifestyle that is in line with earnings, making sacrifices to ensure that debt is paid off, as a means to come back debt-free are all decisions that require determination. There are several instances of psychological damage that severe indebtedness can create, including depression and suicidal tendencies. It is important to take help before it is too late.
Increasing Trend
Digitization has transformed the way the lending industry works. All one has to do is apply online, upload a few documents and loans get disbursed within 24-36 hours, and the younger demographic seems to be more comfortable with data sharing and the concept of credit. Zero-cost EMIs are a thing today and gadgets like mobile phones have become a necessity. Many millennials change their phones every one or two years. Ultra short-term loans with tenure of a few weeks are also easily available.
As much as 80% of the customer base of an online personal loan provider comprises millennials who seek personal loans for a host of reasons such as travel, home renovation and medical emergencies. The company witnessed an increase of 55% in loan applications for travel, of which 85% applicants were millennials. As per another internal report 75% millennials took loans to pay for their wedding.
Millennials buckle under peer pressure and believe in instant gratification, which tempts them to seek such loans. The pressure to keep abreast with expensive, fancy gadgets is high and to be able to ‘fit in’, the only option is to take.
Planners said most millennials don’t fear that they may not be able to repay the loan as they see parents as their back-up plan. They also know that they can take another loan, if required, to pay off the current loan. The down payment itself is done via credit card which provides an EMI option. By availing both options, the big amount is broken down into small bites which the person feels is easy to digest.
Restructure and Reorganise existing Loans
Many banks have a debt restructuring and advice facility that helps chronic borrowers. There are also external agencies that specialise in restructuring debt. Seek professional help to see what is due, and how it can be reworked. Repayment schedules worked out after restructuring may be severe to begin with, but they offer the best scope for repayment. Credit card dues can be converted into personal loans; penalties can be negotiated for waiver; repayment schedules can be structured in line with capability of the borrower.
Make use of Existing Assets
If you have certain assets that you can mortgage or sell to pay off dues, then it would be ideal to use them. You can always get money for mortgaging your house, investments, provident fund balance and even gold the last one is the most favoured option. It may be noted that loans against assets come at a lower rate of interest and makes the job far easier for borrowers. It is even better if you can sell off existing unused assets to repay your dues.
How to avoid Debt Trap?
You know you are in trouble if you begin to rotate your credit card debt between cards. You know you are in trouble when you begin to wake up from the stress of not having the money to pay off your debts.
You know you are in trouble when newspaper reports of a suicide due to debts makes you begin to panic. Use the panic monster to do a hard talk with yourself.
If you are in this trap, cut down on anything other than basic survival spends and start a program to pay back your debt. Break your fixed deposits and other savings to pay back as much of your credit card debt as you can.
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