The Loan Trap
Lets take the case of X, an IT pro. His net take-home salary is say around 35K.
But his ‘actual’ take-home after providing for his commitments, incredible it may seem, is hardly 7000 per month. With that he would meet whatever little needed to run the family and other general expenses. What happens with the rest? Loans - I mean all kinds of it. Home loans, car loans, two-wheeler loans, personal loans, credit card payments etc. etc. Savings? Excuse me, what is meant by that?
What’s wrong with this financial culture? Well pretty much everything.
Call me conservative or financially ultra-conservative or whatever, but I feel some of today’s educated professionals do not have the sense of financial literacy and discipline that was our parents’ forte.
New age multinational banks in metros have significantly changed the way of spending by offering and sometimes even begging a gullible salaried person to take loans and credit cards for buying products he does not need.
If a person will spend a major portion of his monthly income on debts, where does this leave him in terms of planning for the future, his own ventures in the later years, his children’s education, unforeseen medical expenses etc?
No prizes for guessing, he will take yet another loan.
And there is no such thing as free loans. All of them comes with a steady interest rate and some do have a hidden component as well. I know so many of my friends who have bought palatial houses and grand cars but also eagerly waiting for that long term onsite assignment. Because that is the only way they stand a chance of repaying the loans in the foreseeable future.
Where are we heading? I understand this is boom time in the Indian urban economy. But an economy goes trough cycles. A boom will not remain so till the rest of our lives.
The other intangible losses are that this leaves very little scope for a person to take a risk - a course in some business school or a shift in job. Many of my friends are scared of changing a job because of their existing commitments. Any hiccups in the professional front will have a deep impact in their financials and they don’t want to risk it. If they cannot take a risk in their late 20s, what will they do as they get older and when their dependents grow?
I am not against taking loans. Sure we can always go for a loan to buy that house we always wanted to buy. But there should be a measure about how much of our monthly salary goes for a loan commitment and what goes for savings etc.
Uncontrolled consumerism in the garb of globalization, trendy modern living where a major chunk of one’s hard earned money is devoured by multinational financial institutions as interest just plain disturbs me. It will keep a salaried person always a salaried person, always in the rat race and always insecure about the future.
January 16th, 2006 at 6:37 pm
Mr Prabhu,this is the bane of consumerist society.i guess young professionals aren’t sure about what to do with their new found wealth and hence get trapped into this vicious cycle of loans.in this respect i think the media too has to take a part of the blame.
January 16th, 2006 at 8:05 pm
I was thinking of writing a post about it today, but you beat me to it… sob sob!!
January 16th, 2006 at 10:12 pm
Good post.
This is a topic that I was discussing with some friends recently. I always wonder about these people who take these huge loans. You lose your independence first and foremost and the rest of the evils flow from that moment you make that decision. Can you imagine being a honest person with an independent voice after that? I suspect you will also become a politician after that - The constant threat hanging over your head like a cloud will make you do anything unethical to ensure your current position.
Watch out for people who are indebted heavily at your workplace. It’s highly likely that you have run into your friendly neighbourhood politician.
January 16th, 2006 at 11:47 pm
Bang on target.
Not to mention the totally illegal means used by some banks to recover loans.
January 17th, 2006 at 6:10 am
You are right.
But thats completely Ok. Without loans like this, Not much of homes and cars would be bought.
I agree, you need a proratum in fixing your EMI and keep the rest for family.
But Im always in favour of the loans for the next 15 years
BTW, Savings ? Where can you do that ?
January 17th, 2006 at 8:15 am
paurna,
u r spot on.
thamizh idi dhaangi
danks
rams
one is burdened. adhaan fact.
vivek
Thanks and illegal means of recovering loans part is absolutely true.
keerthi
–>u r making lot of assumptions behind this 15/20 yr loans.
>>But Im always in favour of the loans for the next 15 years
–>BTW, Savings ? Where can you do that?
ella loan um vangina kandippa mudiyadhu..
i am not saying all loans r bad. but there shud be a measure of what % of yr salary goes towards loan repayment.
January 17th, 2006 at 11:13 am
Nice article PK. Its scary the way the society depends on loans nowadays for everything, but I suppose that is one of the major causes behind Indian economy’s current boom. As you say the boom will end one day, doesn’t go on for ever. God I sound like a doom and gloom merchant now
January 17th, 2006 at 11:37 am
Prabhu,
What an excellent post! Totally agree with you. Loans and credit cards frighten me like hell. Have gone through a terrible time with the latter. Though I don’t believe in saving too much for the sake of it, I’d still like to curb my impulses with the urge for ‘instant gratification’ and ‘keeping up with the joneses’ attitude that really drives people to take loans!
Cheeers,
Ravi
January 17th, 2006 at 3:15 pm
LOL @ ur savings - what is that?…
its a vicious cycle and people fall trap to it… and all banks want people to spend and not save anymore and 90% of the people are falling prey to it and most without knowing their capacity!!
January 17th, 2006 at 3:51 pm
good post. now a day many calls are coming form Banks to my dad to buy a Loan. and asking u need a credit card.
January 17th, 2006 at 4:43 pm
Well said man!
We can always go for a loan - absolutely no problem- as long as we u’stand the implications….
Also, I have seen my friends taking loans, so that it keeps their vigor to earn MORE MONEYYYYY…
January 17th, 2006 at 7:54 pm
Loans are the main cause of some of the suicides in Kerala. People do not even seem to think before they apply for a loan.
January 17th, 2006 at 9:18 pm
WA
enaku seriousa purila. 50 llaks loan sadharanama vangaravanga ellam buthisaliya?
Ravi
danks. me very cautious abt that credit cards. i use it mainly for booking tickets and purchasing books in landmark. that too nowadays i use my debit cards.
January 17th, 2006 at 9:21 pm
NK
danks.:) but this has spread like an epidemic.
jeevan
absolutely true!
krish
welcome here! -
>>as long as we u’stand the implications….
thats the key. spot on. Alas not many of the educated understand that.
Jo
so sad.
January 17th, 2006 at 11:05 pm
PK
At the first glance I thought you were righting about life here in USA
do our desi folks realize how life could be a living hell if they fail to pay the loans.
You right, we are heading in the wrong direction as far this new credit culture goes.
January 18th, 2006 at 3:47 am
PK - I believe, it is part of a bigger economic cycle. Indian banks are cash rich and they have to push these loans to sustain their business. I do not have an economics background, so is interested in knowing from someone, what would be the downside of people not taking a loan ?.
January 18th, 2006 at 5:06 am
Good one.. I was wondering about writing it too, but along with Tamil Idithaangi, I too convey my congrats in beating us to it (Grr Grr).
This is exactly my view too, banks and financial institutions always want a bigger share, in their words, customer loyalty to the bank, but in other words, more money from the customer. If a customer is already finding it somewhat difficult to payoff the credit card debt, but, it is very easy for him to get a credit limit inc as long as he keeps paying the barest min every month. That is the bank’s way of ensnaring his committment to the bank.
The customer on the other hand, after being ensnared, will call the bank customer service and crib about fees, say around 1% of his total outstanding, which the bank will write off, after much deliberation and the customer is made happy(!!) after one such write off.
I am not saying that the banks or FI(s) charge illegal amounts, its all there in T&Cs, but who cares to read them ? At this stage, it will take X generations to payoff the debt, while the customer is living in a swank penthouse, with a Bose Sound Theatre system with a brand new Toyota Corolla, and all the time just transferring the salary every month into different loan accounts and credit card payments.
January 18th, 2006 at 7:57 am
Ganesh,
Danks ganesh. i too suspect ppl do not realise the loan implications.
Prem,
your question prompts me to write whatever litle i know abt these aspects. am not an economics grad or literate.
Deepak,
you have an industry background. idhu pathi neraya eludhu da…
January 18th, 2006 at 10:20 am
Loans for investment makes sense to me only when we are planned about how much percentage of our salary goes for saving. Loans are not a method to earn money.
I agree it is a good point to discuss, it took sometime for me to understand the economics and how much it will take away the peace. today eveyrbody have their expectations or aims about money, not just to spend but to keep the people dependent on them in comfortable stage and all this depends on how much an individual is capable. It is an involuntary action.