Consumer loans in India are surging. Retail loans account for over a quarter of the total outstanding retail loans. While half of them are home loans, the other half are mostly personal loans and vehicle loans. The total value of personal loans as of March 2019 was at over Rs 22,00,000 crore. Half of these are home loans, and this segment has grown at a steady 15 per cent over the past year.
You take a personal loan for consumption. So, when you spend money on an expensive smartphone or convert that travel expense into equated monthly instalments through attractive offers from lenders, you add to that tally.
Banks and other lenders love you for that. As soon as you inquire about a loan, credit bureau companies like TransUnion CIBIL start collecting data. You could be familiar with the concept of a credit score. Your ability to repay the loan determines your credit score. If you do not make payments on time or do not make payments regularly, you get a poor credit score. Lenders share this information with firms like TransUnion CIBIL. They aggregate the data.
TransUnion CIBIL handles 40 crore customers, out of which 18.5 crores have a retail loan account. The number of inquiries for personal loans surged over 100 per cent in the quarter to December 2018. Nearly 30-35 per cent of those got converted into loans, according to a report by Edelweiss, a securities firm.
Banks and non-banks are aggressively selling personal loans to you. You may have noticed a significant rise in the number of calls you get from lenders. There is so much easy money coming to you. For years, Indians relied on their savings in property and gold to realise their dreams. They continue to do so. However, a sizeable chunk of India’s population has begun to leverage or take loans. The advantage of borrowing from institutions like a bank or non-banking finance company is superior to any private moneylender.
What it means to you
When you are in a situation where you have to borrow, you may want to take into account a few things. First, discuss the purpose of your loan with your family or a financial advisor. If you are borrowing to create an asset like a home, land or a business, you may want to look at multiple options offered to you by banks. In this situation, the property you are buying is usually the collateral. In many cases, banks insist on bringing in collateral. It is an asset against the value of which they would lend. Such loans are called secured loans.
Personal loans are primarily insecure and short-term loans. There is some stigma attached to the concept of a personal loan. Loans from unauthorised and unregulated private moneylenders could be dangerous. There is no legal recourse.
Personal loans offered to you by banks or other lenders are relatively transparent. They highlight or disclose risks associated with them. Your ability to borrow from a regulated entity like a bank or any other institution depends on your future income and your ability to repay the loan. If you are confident about your job or business, you can borrow up to a particular limit of your net income for consumption.
Ideally, you should ensure that you enjoy good things in life with your own money. Having too many loans and investments at the same time makes no sense. It is irrespective of the money you earn. You cannot create wealth if you owe a lot of money to others. To be wealthy, you have to have no loans.
What you should do
If you are young, you may want to get into a saving and investing habit early to enjoy good things in life like holidays or smart gadgets. You can set aside a portion of your income and set it as a ‘Good things in Life’ fund. At regular intervals, you can draw on that fund to pay for your expenses. Starting to invest early and regularly in life can minimise the number of loans you expose yourself to in the future. You are prioritising investing over spending by doing this. That is a good step towards sound financial planning.