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LinkedIn Viral Post: In middle class families, there is always a strict mathematics regarding budget. But do you know that even without any mistake or negligence, a common person can get trapped in such a maze of debt from which it seems impossible to get out? Financial advisor Vivek has shared a very shocking case on LinkedIn. He told that a 36-year-old operations manager living in Pune is today buried under a loan of Rs 15 lakh. The surprising thing is that this person who earns Rs 90,000 every month had never taken any wrong financial decision.
Till about 3 years ago, this person’s life was completely on track. He was living a comfortable life without any loan. His take-home salary was Rs 90,000 every month. Out of this, Rs 82,000 was used for his household expenses, ration, children’s school fees and medicines for his parents. About Rs 8,000 were saved every month. Even though the savings were less, there was no debt. Everything was going well when suddenly his father fell ill. Doctors immediately advised an emergency surgery, the total cost of which was Rs 5 lakh.
Due to not having such a huge cash amount in hand, this person was forced to take a personal loan of Rs 5 lakh at an interest rate of 14%. The monthly EMI of this loan was fixed at Rs 13,663. This was the first decision which spoiled the balance of his entire budget.
EMI burden and the dangerous trap of credit cards
Now just understand the financial mathematics behind this trap. How did that person’s life change after the loan EMI came? Earlier the required expense of the house was Rs 82,000, to which now EMI of Rs 13,663 was also added. That means now his total monthly expenditure has increased to approximately Rs 96,000. But his salary was still only Rs 90,000. The result was that he started getting short by about Rs 6,000 every month. To make up the shortfall of Rs 6,000 every month, he started using his credit card. Household ration, petrol and small expenses were shifted to credit cards.
Huge interest of 40%
Within just one year his credit card bill reached Rs 4 lakh. Now he had to make a minimum due payment of Rs 20,000 every month to maintain the outstanding balance of the credit card, that too with a very high interest rate of 40%.
Another debt to settle Raita; CIBIL score done with a bang
When both the credit card bill and personal loan EMIs started getting out of control, he decided to take another big loan to deal with the situation. By then his credit score had fallen significantly due to continuous use of credit cards and financial pressure. Due to poor CIBIL score, the new loan he got was at a very expensive rate. He had to take another loan of Rs 6 lakh, on which the bank charged a huge interest of 18%. Now another new EMI of Rs 17,625 has been added to his life.
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57% of earnings are in interest only
In the last two years, instead of improving, the situation kept getting worse. As of today, he has a total debt of Rs 15 lakh. He is giving 57% of his monthly salary, i.e. approximately Rs 51,000, only to repay the EMI of old loans. According to Vivek, the man is now just in a ‘Robin Hood’ situation – that is, he is constantly taking new loans to repay the old ones.
Expert advice to avoid financial dilemma
Analyzing this scary situation, financial advisor Vivek says that this is exactly how the debt maze works. One of your loans gives rise to a new EMI, which reduces the cash in your hand and the same reduction forces you to take the next loan. He has given some important tips to avoid this trap. If your total monthly EMI is more than 40% of your take-home salary, then consider it an immediate red flag.
The first and basic rule to get out of this situation is to stop using any new loan or credit card immediately. Make a clear list of all your debts and their interest rates. First of all, repay with all your might the debt on which the highest interest is charged (e.g. 40% interest on credit card). This story teaches us how important it is to have an ’emergency fund’ equal to at least 6 months of life’s expenses, so that you do not have to fall into the trap of loan in case of a medical emergency.
