The perception regarding taking loans has gone a sea change these days. The market has opened up significantly in the past two decades. Home loans have been around for long. It is a secure loan and attracts the lowest interest. Vehicle loan, too, is a secure loan and is available at comparatively low rates. Many times, car manufacturers themselves subsidise the loan to sweeten the deal. Delinquency in the home segment is lower than the vehicle segment due to the Indian consumers' penchant for treating the home as a sacred investment.

But, personal and credit card loans are different. They are both unsecured loans. What's more, these days personal loans are available without collateral or guarantors and require minimum documentation. With rising consumerism and aspirations, personal loans and credit card spends are increasingly the poison of choice. Add to that, cut-throat competition, which pushes the lenders to dive deep into the city's unseen folds to source customers. The cream has long gone. Apparently, people earning as low as 3,000 per month, can now get a personal loan. By its very nature, people who have to take recourse to personal loans may not be financially very sound. Moreover, there are no guarantors or collateral, and loans are being offered increasingly to segments even below the lower middle class. Also, recovery agents have now been restrained and banks have to go through the legal redressal mechanisms, which is notoriously slow. The upshot - rising defaults.

Credit card debt is similar. It is very easy to get carried away by the plastic sliver in one's hands. Since, one does not count out the money and just needs to swipe, one does not realise the outgo. When it comes to payment, many times, there isn't enough money to settle the outstanding in one shot. Hence, people go on revolving credit. That works for some time, till more goods have been bought and the revolving credit payable every month grows into a huge figure. Then defaults happen. Credit cards are also easy to come by. Customers are serenaded with offers of lifetime free credit cards and sugary sweet offers. Even here, the penetration has gone all the way down to those who may not be eligible for a credit card in the first place.

By stretching themselves and defaulting on loans, customers are doing untold damage to their creditworthiness as everything is being captured today and is being reported in one's credit history. Defaults damage one's credibility, making it difficult or more expensive to get loans in future. This could bar defaulters from any access to capital, should they require it, anytime in future.

The previous generation can teach us a thing or two here. Living within one's means is something that today's senior citizens vouch by. No holidays on EMIs or fancy white goods on easy loans for them. While enjoying the good things in life, we all need to watch out and make sure we don't cross the line. Once we are on the other side, we are damaged goods… forever condemned by these institutions which will not extend their line of credit. If that sounds like Armageddon, it is!

Source: The Economic Times