Easy loans can make life difficult

The sales professional found himself dangerously close to falling into the debt trap, not only because of poor planning, but also because it was easy to borrow from fintech companies. Agrawal is no exception. More and more millennials are taking out multiple loans, as access to loans has increased with the increase in the number of lending companies.

According to a recent report by CASHe, a digital lending company, in 2018, 23% of millennial workers took out short-term personal loans to refinance individual IMEs and 14% borrowed to repay their loans. The average frequency of loan renewals was 60 days. Data from CRIF High Mark, a Mumbai-based credit reporting agency, shows that 44% of personal loans were granted in financial year 2019 to people between the ages of 26 and 35 and 13% to people aged 25 or under. The number of personal loans disbursed has grown at a compound annual growth rate (CAGR) of 25%, while the size of the personal loan portfolio has increased by 37% over the past three to four years.

Growing trend

Digitization has transformed the way the lending industry operates. All you have to do is apply online, upload a few documents and the loans are disbursed within 24-36 hours, and young people seem to be more comfortable with data sharing and the concept of credit. “Zero cost EMI is a thing today and gadgets like cell phones have become a necessity. Many millennials switch phones every one or two years,” said Parijat Garg, senior vice president, CRIF High Mark. Very short-term loans, lasting a few weeks, are also readily available.

Up to 80% of the customer base of IndiaLends, an online personal loan provider, includes millennials who seek personal loans for a multitude of reasons such as travel, home improvement and medical emergencies. Gaurav Chopra, founder and chief executive of IndiaLends, said the company saw a 55% increase in travel loan applications, 85% of which were millennials. “According to another internal report, we learned that 75% of millennials have taken out loans to pay for their weddings,” Chopra said.

Three financial planners Mint spoke to said millennials give in to peer pressure and believe in instant gratification, which drives them to seek out such loans. “The pressure to keep up with expensive and fancy gadgets is high and to be able to fit in, the only option is to take out loans,” said Lovaii Navlakhi, Founder and CEO of International Money Matters Pvt. ltd.

Planners said most millennials aren’t worried about not being able to repay the loan because they see parents as their back-up plan. They also know they can take out another loan, if needed, to pay off the current loan. “The down payment itself is by credit card which offers an EMI option. Using both options, the large amount is broken down into small bites which the person deems easy to digest,” Navlakhi said.

Shweta Jain, CEO and Founder, Investography Pvt. Ltd, compares an unplanned loan to a drunk friend. “Everyone likes a drunk friend, but only until they start throwing up. Taking loans is like that. It’s fine up to a point, but it’s very easy to d ‘going too far,’ Jain said.

Tipping point

It’s not always as black and white as it may seem. “If you’re taking out a loan to pay off another one you got at a higher interest rate, that might be a wise move,” Garg said. However, if you take out the second loan to repay the first because you don’t “Sometimes there can be a disconnect between aspiration and financial discipline. With convenient loan processes and easier card availability credit, it’s easy to lose sight of the income-expense ratio,” said Satyam Kumar, co-founder and CEO of LoanTap, an online lending platform.

Keep in mind that instant loans can push you into a debt trap. Garg said you should only get the credit if the total of EMI and dues payable is no more than half of your income on hand.

Often there is no limit to the number of loans you can take out, which means you have to discipline yourself. “Even if the lender is willing to offer credit, the onus is on you to repay. You may also have borrowed from friends or family, which the lender may not know” , said Garg.

Borrow responsibly

Delhi-based Anand Malik, 37, has been taking personal loans from a fintech company for a year now. An accident in 2017 rendered him unable to work and he did not receive his salary for a month. He ended up taking a Loan of 20,000 during this phase. He took out another loan after a while and a few more later to pay his credit card bills. “Since then, I have been associated with the company. Even now, when I need to make major purchases, I contact the company,” Malik said. Although he worries about taking out multiple loans, he sees them as the only option to settle the arrears. “I now try to avoid taking loans despite their ease of access,” he added.

Lending companies push you to take out a loan because it benefits them. “Being eligible for a series of loans or refinance options indicates that you are a great source of income for the loan provider,” said Vishal Dhawan, Certified Financial Planner and founder of Plan Ahead Wealth Advisors.

Never forget to save before you spend. Set a limit on your credit card; if you can’t do it, it’s better not to own one. Also, don’t let messages from fintechs announcing attractive interest rates tempt you to take out loans. Find out the actual interest rate you will end up paying.

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