Debt Trap

Here’s a small allegory for you:

X is a youngish executive with an annual income of 10 lakhs. Over the last few years, he has taken  loans for all sorts of reasons. So much so that last year, his annual EMIs amounted to a total of 5.4 lakh. What is worse is that he is also unable to cut down on his expenses by much. Last year, he spent a total of almost 16 lakh.

To finance the spending and the EMIs, he took fresh loans of 5.25 lakh. He has borrowed from everywhere — on the many credit cards he has, against his property, informal loans from friends and relatives, from his employers etc.etc. In just the last year, he has actually borrowed almost as much as the old EMIs he has paid. So, he is now roughly borrowing as much as he is repaying in interest and principle.

X’s problem is that he an incurable optimist. Every year, he is convinced he will get a big salary hike and bonuses and then starts spending under this assumption. Of course, the increased income never lives up to his fantasies. So, he eventually finds himself out of pocket. He then makes some attempts to control his expenses, but is never successful. The inevitable result — even more loans. This year is no different. He is so convinced that he will get a big bonanza from his employer that he has gone ahead and taken a vehicle loan to buy a car.  Read more of this post