Ever since Saurabh started working he took loans. Firstly he was paying off his education loan. Then, he took a loan to help in his sister's wedding, a year later he applied for a car loan and then again a personal loan for his own wedding.
Since he lived in a rented apartment with his wife and parents, he hardly saved anything. That is why he frequently used his two credit cards, usually maxing out atleast one of them every month. Inspite of earning a decent income, he was living a "hand-to-mouth" kind of life because owing to all his loans he was never able to save money for future.
Let us take a quick glance at his income and EMIs:
|Income:||Rs. 75,000 pm|
|Total EMIs:||Rs. 38,525 pm|
|Rent:||Rs. 18,000 pm|
|Household expenses:||Rs. 25,000 pm|
|Savings every month:||Rs. -6,525|
Saurabh was the only earning member in the family and clearly, he was living way beyond his means. All of this and yet Saurabh didn't realise that they were practically sitting on a ticking bomb.
Saurabh's mother had been complaining about how cataract had distorted her vision completely. He took his mom to a plush hospital which was known for its high maintenance. Doctors suggested she must go under the knife and also said that the cost would not be covered under the mediclaim policy.
Saurabh simply approached a bank for a personal loan which was subsequently declined. When he couldn't think of anything else, he decided to take a loan against gold for his mother's surgery. He promised his wife that he would get her ornaments back soon but he wasn't sure how.
The next day was his birthday and he threw a grand treat for his colleagues at a lavish restaurant.
Saurabh was not only disorganised but also negligent towards his responsibilities. There came a time when he couldn't pay his dues and inevitably he became one of the loan defaulters. The penny finally dropped when he couldn't get back his wife’s gold ornaments and he couldn't face her any longer.
A debt trap is created because one is unable to pay down the principal as the interest is so high. So the payments are essentially gobbled up by the high interest cost and an insignificant amount is left for the principal.
Like Saurabh a lot of people are not able to come out of such a trap easily. The most prominent reason is that people fail to realise that they must alter their lifestyle and curb their expenses to be able to repay their debtors on time. They have an ignorant attitude towards financial matters.
Saurabh could avoid taking his mom to a "five-star" hospital. Instead could have taken to her a good doctor who would be consulting at a different hospital where charges were not so unnecessarily high. He needn't throw a party at a time when his mother was being operated and he had to mortgage his wife’s ornaments to pay for it.
He finally got a kick in the butt when he lost his car and gold ornaments to collection agents. No bank gives a personal loan for CIBIL defaulters. Don't let a situation like this come as a wakeup call. Be alive to it from the beginning.
Firstly, be absolutely sure before you need a loan and nothing else would work only then apply for one. Use online EMI calculators to calculate your EMI, work out its implications on your personal budget, compare it with your income, consider other probable expenses, you must save at least 20% of your salary every month for future needs and take insurance for emergencies.
If you are stuck in a debt trap then use this trick:
You are the best judge of your own financial situation. Be prepared to take on the responsibility of borrowed funds beforehand.
Staying grounded helps a borrower make realistic projections and manage debts efficiently. Loans managed well in the past becoming stepping stones to move forward in future.