Ever wondered why some people get large debts that they cannot reverse while others cannot seem to rattle their finances?
It's rarely the case that those debts are born out of owing big amounts alone; most of the time, small factors that you would hardly give a thought about quickly build up.
In a country like India, where credit cards and loans are becoming more accessible, a few unthinkingly made moves can snowball into a big debt problem.
Let's look at five common mistakes that lead people into this situation and ways to escape that.
1. Spending Without a Game Plan
It all starts innocently: an online sale here, an impulsive restaurant visit there and before you know it, your bank balance is struggling to keep up with your swipe-happy lifestyle. Take Rohan, for instance. The moment he received his salary, he’d celebrate by treating himself to fancy meals or gadgets. Two weeks later, he’d be swiping his credit card for groceries and paying bills. Eventually, he maxed out his card limit and couldn’t pay off the full balance. Month after month, the interest charges crept higher, leaving him stuck with mounting debt.
A big part of the problem is not having a spending plan, or, in other words, a budget. Without knowing how much money comes in and goes out, you can end up overspending on non-essentials.
If you repeatedly tell yourself, “I’ll deal with it next month,” you might be ignoring the looming interest that’s quietly piling up. While it’s easy to say “make a budget,” actually sticking to it is the real challenge. It helps to track your daily expenses for a couple of weeks, just to see where your money goes. You’d be surprised how little amounts – like frequent coffee runs or five-star dinners – add up by the end of the month.
2. Social Media Debt and Instant Gratification
Those belonging to Generation Z (born between the years 1997 and 2012) were reported by Mint to have been borrowing money to attend the recent Coldplay’s concert in India. While they did not have the money, easy access to those tickets using credit cards was what made them buy those tickets because it would look cool on social media.
Many attended the concert of an artist who sings in a regional language which they don’t even understand because it was trending and uploading stories on Instagram would’ve made them look cool.
Similarly, when you can’t resist the urge to take that international holiday when you are running hand to mouth, your bank sends you a notification to take that travel you’ve always been waiting for through a personal loan at anywhere between 10% to 16% p.a. interest that they’ll disburse within the next 10 minutes (as you’ve been their old customer).
The instant gratification and the habit of overspending on wants even though you do not have the money to do it make you fall into a ballooning debt problem. You buy everything that you want now and never wait until you save for it. When your EMI-to-income touches the sky, the banks may stop giving you more loans but there’ll always be either a fintech or an NBFC that can give you more loans and you’ll never want to stop before you realise that it’s too late.
3. Underestimating Loan Terms and Interest Rates
Many people see the word “low EMI” and jump right in without fully grasping the total cost of the loan. Home loans, car loans, or personal loans may seem affordable on paper if the monthly EMI isn’t huge. But stretch that EMI over many years, and you might end up paying more in interest than you initially borrowed. A staggering amount in interest and fees – money that could have been saved or invested elsewhere.
Before signing any loan papers, read the fine print. Ask yourself: Is there a processing fee? Are there penalties for prepayment? What’s the annual percentage rate (APR)? Shopping around for better rates or more flexible terms can save you thousands of rupees in the long run. Don’t forget to compare multiple lenders – sometimes your primary bank might not offer the best deal.
Don’t fall for the flat interest rate bait. Flat interest rates may sound cheaper initially until you realise that they’re more expensive than reducing interest rates.
4. Lack of Emergency Planning
Life doesn’t always send a memo before throwing unexpected costs your way. A sudden medical bill, a job loss, or urgent house repairs can pop up without warning. If you don’t have appropriate insurance covers and some savings set aside to handle these surprises, you might be forced to take on debt at high interest rates or swipe your credit card.
An emergency fund is your financial cushion against life’s curveballs. Think of it as money you refuse to touch unless it’s absolutely necessary. Ideally, aim to set aside three to six months’ worth of living expenses in a separate savings account or a liquid mutual fund. It might seem tough at first, especially if you’re already tight on cash, but even small monthly contributions can grow into a helpful buffer over time.
Medical inflation is rising at 14% p.a. in India, making your hospital bills double in almost every five years. A treatment costing ₹20 lakhs in 2020 would cost ~₹40 lakhs today in 2025. How many people are there in India who can afford this? An appropriate health insurance cover becomes critical here.
Taking a term insurance (a pure-risk life insurance policy) in the name of the person who has outstanding debts and without whom the debts can’t be repaid is also critical. What if the key earning member who has heavy home loans and car loans dies all of a sudden? After all, life is uncertain. Covid-19 made us see many such cases where the key earning member of the family passed away and his/her dependents were left in the lurch with huge debts and banks recovering their assets.
5. Ignoring Debt Until It’s Too Late
Sometimes people keep making minimum payments or juggling multiple loans in the hope that things will magically improve. The harsh truth is that debt won’t just vanish on its own-it requires proactive steps. If you find yourself struggling with monthly repayments or unsure how to manage multiple debts, seeking help early can make a world of difference. You might consider talking to your lender about restructuring options or consulting a loan settlement agency if you’re dealing with large, unmanageable sums.
Shalini, for example, had a car loan, a home loan, and a personal loan. Each month, her salary disappeared into EMIs, leaving her with next to nothing. She kept telling herself she’d figure it out “next month.” A year later, the situation had worsened, and the stress was taking a toll on her health. Once she reached out to a financial counsellor and explored settlement or consolidation options, she found ways to reduce her overall EMI burden. Had she delayed any further, she might have defaulted on her loans altogether.
Final Thoughts
Falling into debt isn’t always about grand, reckless spending. More often, it’s the sum of everyday mistakes – small oversights, impulsive credit card usage, ignoring the details of a loan agreement, or simply hoping things will “work out.” India’s lending landscape offers plenty of ways to borrow, but it’s up to each individual to ensure they’re using credit responsibly.
By crafting a basic budget, staying alert to credit card balances, doing thorough research on loan terms, planning for emergencies and addressing debt issues head-on, you can avoid the slippery slope toward serious financial trouble. And if you’re already feeling the pinch, remember there’s no shame in seeking professional guidance. Acting early can save you a lot of money – and even more peace of mind.