How not to Fall in Debt Trap

How not to Fall in Debt Trap

Every single day, including Sundays I keep on getting calls and SMSes asking me if I was interested in a loan or my doctor/engineer loan is ready to be credited to my account. All I have to do is click on the link provided. Even as I write this I receive a phone call offering me all kinds of loans.

This only proves one thing – Today taking a loan is becoming easier and easier. You may easily get a loan but it may not be a cake walk repaying the loan in the form of EMI.

Most of us are not able to handle money the way it needs to be handled. We may think we are experts or experienced in handling money, but it can be far from reality.

Why are we so ignorant when it comes to handling money?

One reason is because in Schools, Colleges, and Universities, we are taught the subject of finance but not the subject of money.  So, we may know how to create a Balance Sheet and Profit & Loss Statements but we fail with money.

You may ask – ‘So, are you suggesting that I should not go for a loan?’

The answer is ‘A BIG YES! Unless...’

Yes, there is unless to it. Just because someone is offering you loan doesn’t mean that you should go about accepting it.

Loan is an integral part of economy. It helps keep the money in circulation and the society at large benefits from it. So, taking a loan or going into debt is not something that is really bad. It’s not a sin.

But you need to be aware of certain rules of getting into debt and you need to dedicatedly follow it. Even if you miss one time food, you cannot allow these rules to fail.

Let us look at 2 Fundamental Rules. If you are willing to agree to these two rules and commit yourself not to break it then you are financially and emotionally ready to get into debt.

#1 Rule of Getting into Debt:

“Don’t allow your EMI to exceed 50% of your income.”

What this simply means is that if your monthly income from all sources is twenty thousand (just for calculation sake) then your EMI should be either less than ten thousand (fifty percent of twenty thousand) or a maximum of ten thousand. It should never exceed ten thousand.

Never take a loan on your future expected income. It may come, it may not come. Don’t try to convince yourself by being positive, thinking that you will be able to do it. I am being blunt with you and you may hate me for that. I am not de - motivating you. I have been there and experienced it firsthand. I learnt the hard way – “future income is in the future. There is no surety that it will arrive on time every month. But your EMI will arrive every month on the same date whether it is sunshine or storm.”

#2 Rule of Getting into Debt:

“Ensure on time and regular payment of your EMI.”

Right now you may say confidently that sure, you can ensure you will pay all your EMI on time. Chances are in future things may go out of control. You need to have some hard cash in your bank account to back up your confidence.

So, before you say YES to this rule ask yourself – ‘do I have surplus amount in my bank account that can be used to pay at least three months EMI without disturbing my current lifestyle, if financially things start going wrong for me?’

If your answer is yes and you can see that surplus amount in your bank account as liquid cash then surely you can think of going in for that loan.

In Conclusion

“Okay, whatever you have said all sounds great. But Rakesh, even though I cannot fulfil one of the above rules (or both rules) I need to borrow money. I have no other option.”

My dear friend, you are the best judge. If that is the case then borrow if you must borrow. But then you need to keep just one thing in mind. I would suggest get this one point typed on a computer, take a print out of it, frame it, and hang it on a wall where you can see it daily. Next time you feel like going out and spending money for whatever reason, look at this statement. It will keep you alert. It will help you justify whether you need to spend that money or not.

Here’s what you need to get framed – “I have to PAY my EMI on time!”

That’s it! No other fancy stuff. This one sentence will keep you reminding that you need to have enough cash in your account to honour your EMI every single month. Do not even think of faltering on your EMI repayment. Even a single EMI default will shoot up your interest amount payable. You will have to struggle to get that additional thousands of rupees in increased interest amount. Long term implication can be - you might even make it a habit. Your mind might start suggesting to you – ‘last month I defaulted... if I default this month also its okay, no big deal.’

Be warned! Repeating certain behaviour for long makes it your habit. If you develop this habit you will be digging a debt trap for yourself and your family.

Over and above this, at the back end your credit history, your CIBIL Score will drastically go down making it difficult for you to take loan or raise finance in future from banks or financial institutions.

Think logically and not emotionally before you decide to get into debt.

On a final note, when you take a loan, always be in control of your debt; don’t allow your debt to take control of your life!

It’s okay to be in debt but it’s not okay to be in debt trap because debt trap can lead to death trap.

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