Before we dive into the nitty-gritty of borrowing money, let me make one thing clear: I am not an advocate for taking on debt. In fact, I firmly believe in the saying, “The borrower is a slave to the lender.” However, life sometimes throws unexpected challenges our way, and in certain situations, borrowing money might seem unavoidable.
This blogpost aims to help you navigate the complex world of debt, ensuring that if you do borrow money, you do so in a way that keeps your financial health intact. Whether it’s an emergency expense, a necessary investment, or an unavoidable financial obligation, knowing how to manage debt effectively can make a world of difference.
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The Growing Debt Problem
Debt is becoming a major concern for many Indians. A recent survey found that 27% of Indians are struggling to pay off their existing loans, and an alarming 75% don’t have an emergency fund. This means that in the face of an unexpected financial crisis, a significant portion of the population could default on their EMIs (Equated Monthly Instalments).
The situation is even more worrying among young people. Studies indicate that one in three millennials and nearly 40% of Gen Z individuals in India are grappling with unmanageable debt. This trend is driven by aspirational spending, easy access to credit, and a lack of financial literacy.
With rising interest rates, debt is becoming more expensive. People who take out personal loans or rely on credit cards to meet their expenses are paying significantly more in interest, further deepening their financial burden. What’s worse, debt doesn’t just affect your finances—it can take a toll on your mental health, leading to anxiety and stress.
To avoid sinking deeper into the debt trap, you need a strategy. The first step is understanding your debt service ratio, which tells you how much of your income is going toward repaying debt. If you find yourself constantly struggling with EMIs, increasing your credit limit, or borrowing money just to cover everyday expenses, it’s time to take a step back and reassess your financial habits.
Four Key Rules for Borrowing Money Responsibly
1. Know How Much Debt is Healthy
How much debt is too much? There’s no universal answer because everyone’s financial situation is unique. However, a good rule of thumb is to ensure that your debt is within a manageable limit—meaning you can comfortably make payments without compromising your essential expenses or savings.
A useful way to assess this is through the debt service ratio. This is calculated by dividing your total monthly debt payments by your total monthly income. For example, if your monthly income is ₹80,000 and your total EMI payments amount to ₹20,000, your debt service ratio is 25%.
A ratio of 25% or lower is generally considered acceptable. Anything beyond this signals that your debt may be reaching an unsustainable level, and you should take action to reduce it.
2. Be Selective About Where You Borrow From
If you must borrow money, always choose a reputable financial institution. Banks and recognized lending organizations operate within a regulated framework, which means they follow transparent policies on interest rates, fees, and loan terms.
One additional benefit of borrowing from a regulated institution is that it helps build your credit history. If you ever need a home loan, car loan, or any other large financial assistance in the future, a well-maintained credit record will work in your favour.
Your credit score is influenced by your repayment history, outstanding loans, and how long you’ve been using credit. A high credit score can make borrowing easier and help you secure loans at lower interest rates.
3. Avoid Unreliable Sources of Credit
While there are many ways to borrow money, not all of them are advisable. Some sources can lead to serious financial and emotional stress. Here’s what you should watch out for:
- Borrowing from Friends and Family: While this might seem like an easy and interest-free option, it often leads to strained relationships. If you fail to repay the loan on time, it could create long-term tension with your loved ones.
- Loan Sharks and Unregulated Lenders: These lenders charge exorbitant interest rates and resort to aggressive recovery tactics. Since they operate outside the legal framework, borrowers have little protection against unfair practices.
- Certain Private Banks and Recovery Agents: Unfortunately, even some formal financial institutions engage in unethical recovery practices. Although the Reserve Bank of India (RBI) has issued guidelines to ensure that borrowers are treated with dignity, harassment from recovery agents still continues in some cases. If you face such issues, know that you have legal recourse, including filing complaints with the bank or regulatory authorities.
4. Borrow Only for the Right Reasons
Debt can be used for anything—from buying daily essentials to financing major life purchases. However, not all borrowing is wise borrowing. Before taking out a loan or swiping your credit card, ask yourself: Is this purchase worth the interest I will have to pay?
Here are some things you should consider borrowing for:
- Buying a Home: Real estate is generally an appreciating asset, meaning its value increases over time.
- Higher Education: Investing in skills and knowledge can improve your earning potential.
- Business Investment: If borrowing money helps you grow your income through a well-planned business, it may be worth considering.
On the other hand, here are some things you should avoid borrowing for:
- Luxury Shopping: Clothes, electronics, and entertainment purchases should be covered with disposable income, not debt.
- Regular Expenses: If you need to borrow just to meet monthly expenses, it’s a red flag that your finances need restructuring.
- Impulse Buys: Using a credit card for things that don’t add long-term value to your life is a quick way to accumulate unnecessary debt.
Final Thoughts: Borrow Wisely, Live Freely
Debt isn’t inherently bad, but it needs to be handled with caution. Borrowing responsibly means understanding how much debt you can afford, choosing the right lenders, and ensuring that the money is used for the right purposes.
Financial freedom comes from living within your means, building an emergency fund, and making well-planned borrowing decisions. If you manage debt wisely, you can avoid financial stress and work toward a secure, worry-free future.
So, before you borrow, ask yourself: Do I really need this loan? If the answer is yes, make sure you’re borrowing smartly, safely, and sustainably.
Check out my other blogpost on the key steps to follow if you fear that you have a low Credit score and want to improve it.
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