Never borrow too much

If interest rates go up or there is a pay cut or job loss, your calculations could go awry

Mrunmay Das

    Youth — fresh from Bschools or engineering colleges — borrow as soon as they draw their first salary. It starts with an innocuous looking instrument called credit card. For the first couple of months, expenditure on the card is made carefully and the outstanding is cleared on time. But soon, the outstanding on the card is not fully paid and interest starts getting charged at a very high rate. Gradually, personal loans available are readily accepted. If large employers offer soft loans, those too are accepted. A two-wheeler or even a four-wheeler loan is availed and the new asset is flaunted to friends and family.

    At 35 years, a successful professional has two cars, a house, a flat elsewhere for investment purpose, a dozen credit cards and a range of EMIs to take care of. Suddenly, people have no time for family, responsibilities keep increasing at the work-place, unhealthy lifestyle values creep in and strangely one is talking about mid-life stress and burn out. Still, one can claim all this is manageable if the cycle were to go on at this pace. But, throw into this scenario a recession or slow down of the economy, such as the one currently engulfing India, things suddenly become very unpredictable. Typically, the housing loan EMI is around 40% or less of one’s monthly income. In a bad market condition, if the interest rates go up or there is a pay cut or job loss, cash-flow management becomes difficult, even impossible.

So, the question is: Should we borrow, and if yes, when and to what extent?

Typically, the sales force of lenders is mostly in their first or second jobs and are very new to their work. They are given stiff targets from day one and the only way they see to meet those targets is to push the loan through the throat of an earning individual.

    They have their internal criteria of lending and if they find someone qualifying, they just go after him till the loan is given and their sales target is met. There is no time for counseling towards evaluating the justification of an additional loan.

    The proper approach to remain low on debt, acquire assets and fulfil dreams should start with good budgeting. One should segregate long term goals and short term expenses, most of which are recurring. Then have a clear estimate of income flow into bank accounts. Therefore, the need is to aim for higher savings and more importantly the need for proper evaluation before the purchase of any large asset. Any such purchase should be balanced against long-term requirements like marriage, education, healthcare for elders and yourself, etc. Try to save for the asset and avoid borrowing.

    You may have to avoid buying a particular asset or a more expensive brand to achieve the overall balance. If you remain focused on the long term objective to stay light on borrowings, you can achieve it and still lead a long and healthy life with happiness and family around you.

    Pay the outstanding on your credit card on time. Credit cards are for convenience and emergency, rather than a way of life. And, it is always better to leave your creditworthiness intact for rainy days, to be able to easily borrow, than stretch yourself totally when the going is good leaving no cushion to fall back upon.

(The writer runs wealth management firm Das Capital)