Nithin Kamath sees debt crisis from personal loans, credit cards in next 2 quarters | Smart fixes to skip default trap

Zerodha co-founder Nithin Kamath sees the trend of rising credit card and personal loans and ballooning debt in the next two quarters, which will likely result in a surge in default, uprooting the financial stability of families.

In a post on social media platform X, Kamath mentioned the benefits and drawbacks of borrowing.

“After the pandemic, there's been a big increase in personal loans and credit card borrowings. The good side of this is the deepening of credit, but the bad side is some people seem to have borrowed too much or borrowed despite not being able to afford it,” he wrote.

Trap of pre-approved loans

According to him, most loans are under ₹10,000 from fintech apps, and the share of people who took a loan due to repeated spam messages from loan apps asking people to take ‘instant pre-approved loans’ remains uncertain.

With this rising use of credit cards and personal loans, the default in payments has increased, too.

"The defaults among this segment that can't afford to take loans are starting to increase. This data is from CRIF. These delinquencies started to show up in the numbers of banks and NBFCs a couple of quarters ago. So yeah, we'll get to know the true extent of the problem in the next couple of quarters, Kamath stated.

Nithin Kamath's advice

He suggests measures such as paying high-interest loans as well as credit cards first.

“If you are in debt, the psychological effects will show everywhere from your personal life to your workplace. Ensuring you get out of debt has to be the first thing you do even before you save and invest."

A credit card allows you to make expenses up to a certain credit limit decided by the card issuer. It works like revolving credit, wherein you can spend money through a card and pay it off later.

How to use a credit card wisely?

• Budget: Before getting a credit card, it is essential to have a budget that suits your income and expenses. While preparing a budget, keep in mind the funds required to pay credit debt as well.
• Choose the right card: Opt for a card that suits your budget as well as your spending habits. A credit card with low interest rates and annual fees is recommended to save some costs.
• Check credit card rules and fees: It is important to check credit card rules covering various aspects, including interest rates, repayment cycles, and fees for late payments or exceeding your credit limit. This will help you make informed decisions and manage your credit card effectively.
• Minimum payment rule: Most credit cards have a minimum payment rule for each billing cycle. While clearing the minimum amount due may seem convenient, doing so will accumulate debt due to high interest rates on the remaining balance. Therefore, it is advisable to pay the entire credit card bill on time.

Personal loans may seem like a good option for those who want quick access to funds without providing collateral.

Tips to make smart personal loan decisions

• Current financial situation: Before taking a personal loan, it is essential to assess your current financial situation. Take account of your income, expenses, existing debt and your repayment capacity.
• Borrow what you require: Do not go overboard with your borrowing. Opt for loans suiting your current financial needs and avoid unnecessary debt.
• Check other costs: Apart from interest, personal loans include other costs such as processing fees, prepayment penalties, late payment fees and other related charges. Before applying for a loan, it is essential to check for such costs to avoid default.
• Repayment plan: Before seeking a personal loan, formulate a repayment plan. Calculate monthly instalments and their impact on your current finances. This will help to accommodate your personal loan EMI without straining your finances.

In a nutshell, both credit cards and personal loans are good ideas if exercised wisely and for the right reasons. They can get you money easily and fast, with some flexibility, too, but they have associated risks in case of ineffective management. A thorough study of financial platforms and options available would help avoid the ignominy of default.