We often see the term ‘BUY NOW PAY LATER’ being flashed by banks, credit card companies and both online and offline stores. From instantly disbursed personal loans to ‘No cost EMIs’ to pre-approved credit cards, there are several attractive credit schemes available today to meet our various consumption needs – from consumer goods to overseas travel and the like.
If you are a millennial, your parents and grandparents have probably always advised you to budget and save and to buy only what you can currently afford. So you may find it liberating to fund your desire for the latest phone or for a new car on credit i.e.: buy and use now and pay later in instalments.
The latest statistics1 published by the RBI have revealed that the Indian household debt has almost doubled in the last year, increasing from INR 3.7 lac crore to INR 6.74 lac crore. This also indicates a steady shift in spending habits of today’s households – a shift from ‘saving what you earn to spending what you have not yet earned’.
While the availability of a credit period for making payments as well as the joy of enjoying luxuries easily at your fingertips may make it seem like a win-win situation, but one needs to step back and take a look at the pitfalls that living on credit brings:
High interest costs
Most consumer and personal loans in India carry interest in the range of 12 to 22% p.a.2 Credit card companies can charge interest up to 36% p.a. Let’s look at an example of how much these high interest costs can actually end up costing you every year.
Example – Mr. A has availed of loans of INR 9,00,000 for various purposes
Mr. A ends up paying interest of INR 2,55,792 for purchases of INR 9,00,000
Apart from the interest costs, most finance companies charge processing fees which can range from 1% to 3% of the loan amount2. Credit card companies can also charge late payment charges of INR 250 to INR 1,000 each month for delayed payments of outstanding amounts. These charges further push up the cost of living on credit.
As things are available so easily on EMI, you may eventually find yourself living beyond your means and get caught in a vicious debt trap.
Apart from continuously living on credit, this debt trap can also prevent you from building a contingency fund, building savings/investments or from saving up for bigger purchases such as a house or for opting for taking up larger but more important asset building loan such as a home loan.
The mounting debt may also lead to high stress especially in case of loss of income on account of any unplanned event.
While it’s easy to be lured into such a debt trap, it isn’t too much of an effort to steer clear of it either.
While you still want to enjoy the luxuries available to you easily on credit, it requires a little patience and effort to fund the same luxuries through prudent investing without falling prey to a potential debt trap.
A penny saved is a penny earned
A little conscious effort to study your finances, setting both lifestyle and finance goals and identifying a financial roadmap can go a long way in achieving these goals without getting caught in a debt trap.
The age old saying – ‘a penny saved is a penny earned’ holds true in the current day scenario as well. The tweaking that could be done is that instead of opting for traditional saving methods, you can opt for other investment options.
Mutual fund investments via systematic investment plans (SIPs) made in the right funds can help you compound and multiply your savings to fund your various consumer needs.
In the above example of Mr. A having availed various loans, let’s look at how Mr. A could stand to gain if he invested the same amount paid as EMIs into mutual funds.
Example 1A – Mr. A opts to invest the total amount of INR 29,256 (for first 12months) and INR 20,183 (for next 22 months) which he was otherwise paying as EMIs into SIPs (Since Mr. A is investing for short term, it is assumed that he will invest in Debt funds where an average return of 8%p.a .is expected)
Mr. A can fund his purchases by investing the same amount he would have paid as EMIs into SIPs
Entire purchases of INR 9,00,000 can be funded in 34 months
Mr. A could have potentially saved 26 months of paying EMIs
As you can see a little bit of conscious spending along with planned investment discipline can enable you to fund both your need for luxuries without sacrificing on building your savings.
The savings in EMIs and high interest costs can be used towards future investments or could even be put towards high value asset building purchases such as a home.
So while the ‘BUY NOW PAY LATER’ promise may look attractive, take a step back and look at what your real financial goals are else you may get caught in situation of ‘BUY NOW REGRET LATER’
1Handbook of Statistics on the Indian Economy - https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=44986
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.