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A few borrowers may literally get hurt by debt

  Saturday, October 22, 2016     written by : CSF-Team
Debt

Excessive debt is never a good thing, and research reveals that the ramifications may be worse than what was previously believed. There are consequences that hurt not just your financial well-being, but your physical and mental health can also be at stake.

Let us take a look at what impact debt can have on your financial life.

For starters, you should know that every loan you take, or credit card that you avail of immediately reflects on your credit information report, which is nothing but a detailed history of your credit behaviour. Derived from this is the credit score, a three-digit representation of the report, which is the first piece of information that lenders go through when you apply for fresh credit. While a loan which is serviced well (by way of timely EMI repayment) reflects well on the score, any delays or skipped payments (or payment default) in the loan will immediately impact the credit score negatively.

When a lender views the score (albeit not in isolation) they use it as a yardstick to measure an individual’s creditworthiness, or the likelihood of the loan going ‘bad’. A higher score normally means that when you do make an application, chances that the lender sanctions your loan or approves your credit card application are that much better.

Hence a bad score does two things for you:

  • 1) Results in a loss of opportunity, when you actually do need to avail of the loan your application is likely to be rejected. This could also mean an increase in your cost because the price of the product (a car, for instance) went up from the time you had initially decided to make the purchase but were denied the loan.
  • 2) Your eventual cost of purchase goes up, because even if your loan is approved, the rate of interest might not be the most competitive, which means that you pay more for the same house or car, because of the higher interest, than you may have paid otherwise. While lenders do give loans for low credit score, it is not a win-win situation for the borrower at all.

Constantly being in debt and defaulting on payment also puts you at risk of being on a CIBIL report defaulter list, which essentially is information maintained by lenders for loans that have gone back with them. This then drastically reduces your chances (or more likely eliminates them entirely) from getting a loan approved at a future date.

Further, being in debt constantly also means that your income will never suffice to meet your needs, because you have loans or credit card bills to pay off. Hence you also lose out on the potential to save up for that proverbial rainy day, or even for instance retirement planning. Being in debt therefore can be a strain on your finances for a long time to come, Debt also has an impact on your physical wellbeing, because being in a downward spirally debt trap plays havoc with your mental health. It is a medically proven fact that stress can manifest itself into physical ailments such as high blood pressure, and hence can literally be the cause of pain.

When it comes to mental health, financial stress or insecurity can lead to people feeling as if they have less control over their own lives, and can view even the least stressful situations very negatively. Often, these people resort to prescription painkillers or other medication to help them overcome the pain.

Hence, excessive or bad debt is overall a loss making situation, and its range is extensive. Not only is it the cause of draining finances and bad credit health, but the emotional and physical trauma also cannot be ignored.

How best to manage debt so as not to burden yourself

The thumb rule is, borrow only what you can repay. When you apply for a loan, do some homework yourself – understand what your current expenses are, versus your inflow (by way of a salary or business income) and arrive at an amount you think you can comfortably repay.

Apply for debt only when you really need it, and not because there is an ongoing offer (possibly linked to some freebies) that you want to avail of.