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5 Debt trap monsters and how to get out of debt trap

With growing consumerism, debt trap, a word very common in the Western world, is becoming very popular in India. More so, with the heavy loans and EMIs that younger Indian consumers are taking. With the rapid expansion of the private sector jobs for the young (age below 30) and with increased options of getting a loan for any age group, many in India are now facing a huge issue – debt trap. Simply put, taking a loan to clear a loan is debt trap. Once upon a time, debt trap would not have bothered an India, but with CIBIL credit scores being tied up to PAN, DL, Passport, Adhaar, there is no way escaping from debt trap and its merciless consequences.

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Here are simple ways you can set yourself free from each of the debt monsters.

    1. Credit cards and its use: The biggest culprit in the debt trap is credit card and hence it lies at number 1. Always
      1. Pay your credit card bill in full and 2 days before the due date. Paying the minimum amount leads you to attract the heavy 3% per month interest charges. Paying 2 days before due date ensures that the bank gets the money in time. Unless you are really short of money, never never go for paying the minimum due and get the 3% monthly .
      2. Never have more than 2 credit cards: Don’t get an extra credit card for that movie ticket which you will never purchase. Have only 2 credit cards, preferably the ones which are tied to your bank so that you can pay on time and be assured that payment is received.
    2. Auto Loan: Preferably try not to get into Auto loans. You don’t get any tax benefit, plus after 5 years you realise that you paid a lot more for a depreciating asset. Having auto loans creates an additional EMI that creates an unwanted need to get an extra credit card. The extra headache of paper work and the associated charges after closure of loan needs to be taken into account too.
    3. Personal loan: This is the loan that gets you into doing all the bad things! So easily available and makes you trap in an EMI world. Personal loans should be avoided and taken only in case of serious emergency.
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    4. Home loan: The biggest burden on Indians is the home loan. With EMI as high 60,000 per month, the home loan puts an end to all your happiness! It is always wise to keep looking around to transfer the loan to a loan having less interest rate. Remember, the interest rates in home loan may look less, but it is for 15 years or so. The only advantage a home loan has is the additional tax benefit for the principal amount paid and the interest. And of course, your home, your space.
    5. Get a SEBI RIA get your expenses assessed: Getting your income and expenses assessed is the best thing you can do to yourself. Many people don’t understand the significance. A SEBI RIA will do more than just what an “app” does. Of course, there are apps that show how much you spend etc, which can be used as an input, but having the optimum income-expense and then optimum investment is very important.
      1. The investment that will help you get returns that can then be used to offset the loans
      2. Expenses and undue EMIs can be closed or personalized advice can be provided to solve the debt trap monster.
      3. The SEBI RIA can also advice you for getting the right insurance. So that in case of emergency, medical or unfortunate death, you won’t have to beg around for money at the hands of pitiless banks.

Image sourced from Internet and from childrenssociety.org.uk 

The Author, Krishna Rath, is the founder of  finvestor.in a place for financial investors to get their answers on what and where to invest. An avid technologist, Krishna is an MBA from IIM, ALMI from LOMA and is a SEBI Registered Investment Advisor (RIA). He was worked with several financial firms in building critical information systems and now has taken up the challenge to build systems around financial planning for investors.

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