BHUBANESWAR: Banks and NBFCs are carpet bombing potential customers with deals such as offering personal loans in ten minutes, allowing conversion of purchases into EMIs or by issuing no annual fee credit cards.
These loan products, however, come with their own caveats and so experts warn it may result in people spiralling downward into a debt trap.
Data released by the Reserve Bank of India shows credit card spending grew by leaps and bounds as the outstanding credit cards’ loans jumped to Rs 74,400 crore as on June 2018 from Rs 19,579 crore as on May 2010, while other personal loans rose to Rs 19.33 lakh crore, a leap from Rs 5.89 lakh crore in May 2010. Notably, the total number of credit cards outstanding was a whopping 3.93 crore.
So, who takes these loans? Vani Pattnaik, a 22-year-old architecture student from a city-based college says she is still carrying her last year’s debt as we head into yet another festive season. Like Vani, there are several millennials who use credit cards for small-ticket purchases such as consumer goods, travel or largely to bridge their cash flow requirements till salary dates.
“A significant number of people, especially in the age group of 25 - 40 use these loan products to make ends meet, and with higher purchasing levels and growing consumer credit access, these are bound to go higher,” says Aditya Kumar, founder & CEO Qbera.com.
On the other hand, these outstanding amounts are charged usurious interest rates since the unpaid balance is an unsecured loan to the cardholder. For those entangled in a debt trap, Kumar says it is essential to have a sound planning in place and carefully use the available options ahead of the festive season, when people tend to overspend.
To avoid falling into the debt trap, one should take a personal loan and refinance the existing higher interest loans, like credit cards, the moment one finds difficulty in managing their EMIs, he adds.
People also tend to fall for the 0 per cent EMI scheme — a clever ploy that lenders use in conjunction with distributors of consumer durables and lifestyle products — without realising that the high processing fee and file charges for the loan is where the lender is making a killing.
“If you buy a washing machine worth Rs 50,000 at 0 per cent interest for six months by paying a processing charge of Rs 2,000, you have effectively paid more than 14 per cent interest on the borrowed amount,” notes Raj Khosla, founder and managing director of Mymoneymantra.com.
Given the rather attractive returns on unsecured loans, lenders are expected to maintain their sharp focus on this segment. However, to cut the long story short, its important that consumers understand the financial mechanics of loan products and use credit wisely.
So how does one make a choice? Just paying the minimum monthly amount on your credit card may seem enticing, but that’s the easiest way to land in a debt trap. According to experts, the best way is to pay the outstanding amount in full by the due date before ringing new balances on them every month.
Outstanding credit card loans:
■ June 2018: Rs 74,400 crore.
■ May 2010: Rs 19,579 crore.
Outstanding personal loans:
■ June 2018: Rs 19.33 lakh crore.
■ May 2010: Rs 5.89 lakh crore.
Outstanding loans on consumer durables:
■ June 2018: Rs 20,300 crore.
■ May 2010: Rs 8,138 crore.
Source: RBI