Is ease of borrowing pushing millennials towards a debt trap?

Millennial borrowers are financing their lifestyle spending by taking short-term loans and swiping their credit cards at will. Nilanjana Chakraborty and Disha Sanghvi ask experts how millennials can borrow safely, without risking their financial future

Indians are borrowing more. Not only has the number of borrowers increased over the past decade, the ticket sizes of loans have also shot up. Millennial borrowers are financing their lifestyle spending by taking short-term loans and swiping their credit cards at will. With the advent of easy loans offered by digital lending platforms, this trend has seen a further spike. But there is a darker side to watch out for because the more one borrows, the deeper they can sink into a debt trap. Nilanjana Chakraborty and Disha Sanghvi ask experts how millennials can borrow safely, without risking their financial future.

Adhil Shetty, Chief executive officer, BankBazaar

Adhil Shetty, CEO, BankBazaar
Adhil Shetty, CEO, BankBazaar

Use right credit product for right expense to avoid debt trap

Access to credit products has become faster, more convenient and transparent over the last decade. This has helped millions of people fulfil their aspirations—from buying a home or vehicle to funding their education and wedding—without having to burden their parents. Accessibility to credit has also brought a large section of the people into the formal banking system, which is a safer alternative.

It would not be right to conflate debt traps with easy access to credit. Debt traps are a result of poor or incorrect financial management and occur when you borrow more than what you can repay. Using the right credit product for the right expense is the first step to avoiding a debt trap. Today’s consumers have access to reliable information in a variety of formats, covering the various credit products, features, and so on.

So, with a little effort, it is easy to understand how you can make use of the right financing options to realise your aspirations without falling into a debt trap.

Shweta Jain, Chief executive officer and founder, Investography

Shweta Jain, CEO and founder, Investography
Shweta Jain, CEO and founder, Investography

Spending today what you will earn tomorrow is not healthy

It has never been easier to take loans than it is now. People are tempting us, chasing us, and hounding us to take loans. India has always been a country which saved and we took pride in that. But we have now moved to a consumption-driven society. Having a fancy lifestyle has taken the centre stage. By itself, it is not dangerous. But along with the ease of credit, it’s a scary combination. You are spending money today that you will earn tomorrow. This could have disproportionate and disastrous effects. The number of people in financial distress due to loans because they overspent at weddings or vacations and are now finding it difficult to manage equated monthly instalments (EMIs) is very high. It is like a chakravyuh (mythological labyrinth) which we haven’t figured out. You know how to get in it but, unfortunately, no one is teaching you how to get out of it.

So, before you fall prey to the fancy holiday pictures splashed all over your social media feeds by finance companies, sit back, save for that trip instead and then travel.

Sujata Ahlawat, Vice-president and head, direct to consumer interactive, TransUnion CIBIL

Sujata Ahlawat, Vice-president and head, direct to consumer interactive, TransUnion CIBIL
Sujata Ahlawat, Vice-president and head, direct to consumer interactive, TransUnion CIBIL

If you are not conscious, future access to credit will suffer

Millennials are eager to achieve their financial goals faster than ever before, and are keen on using credit to make their dreams come true. A Cibil score of 750-plus reflects good repayment habit and can help consumers get access to credit at different stages in their lives. Hence, new-age consumers need to stay credit-conscious so that their actions today do not negatively impact their future access to credit.

For starters, make timely payments a habit. Ensure you pay all EMIs and credit card bills on time. The next important point is to know your credit limits. Limiting credit utilization to 30% of the total credit limit helps build your credit profile. Maintaining a balance of secured (such as home and car loans) and unsecured loans (personal loans and credit cards) is viewed positively as well.

If you are new to credit, you can start creating your credit footprint with smaller consumer durable loans and ensure that you pay the EMIs on time. Taking a credit card can be handy, as long as you pay your bills on time.

Ashish Singhal, Managing director, Experian Credit Information Co. India

Ashish Singhal, Managing director, Experian Credit Information Co. India
Ashish Singhal, Managing director, Experian Credit Information Co. India

Millennials need to have repayment discipline

We have seen 20% growth in lending on a year-on-year basis on account of ease of lending and willingness of consumers to borrow for discretionary spends. Our data shows that millennials contributed more than 60% of such loans by volume, with their contribution increasing by 7% between 2015 and 2018. We have also observed that even though more millennials are borrowing, there is no significant increase in average borrowing per customer, indicating that more millennials are entering the formal credit system. The very young borrowers (age group of 22-25 years) have shown a 15% increase in contribution over the same period with about 55% being first-time borrowers. Our study shows that delinquency for this segment is slightly higher than the rest of the millennials. Since the total exposure and ticket size are very low, it does not pose any risk to the overall industry. However, defaults by these customers could impact their ability to borrow in the future. Hence, there is a need for repayment discipline.

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