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Borrowers must first assess their current financial situation and create a budget: Ritesh Srivastava

Updated: 23 May 2023, 09:19 AM IST

In an interview with MintGenie, Srivastava said that the adoption of the BNPL technique has led to a significant increase in the total value of debt in India.

Ritesh Srivastava, Founder & CEO, FREED

Ritesh Srivastava, Founder & CEO, FREED

A debt relief counsellor can provide the right guidance, especially to borrowers who have fallen behind significantly on their debt repayments or are struggling to pay their loan expenses, says Ritesh Srivastava, Founder & CEO, FREED.

In an interview with MintGenie, Srivastava said the easy availability of credit and the prevalence of the buy now pay later (BNPL) culture contribute to India's debt culture.

Edited Excerpts:

Q. What is the first step you recommend for debt-ridden people to become free of their liability?

The first step for a borrower stuck in a debt trap and looking to become free of liability is to assess their current financial situation and create a budget. This involves taking a detailed look at one’s income and expenses to understand where the money is being spent. 

It is crucial to identify areas where one can cut back on unnecessary spending which may involve making lifestyle changes such as downsizing home, cutting back on entertainment expenses, or finding ways to increase one’s income. This approach can help one in creating a realistic budget that allows them to live within the means while making regular payments towards their debts.

Once a budget has been created, the borrower must determine where they can concentrate their repayment efforts first. This may involve a focus on paying off high-interest debts first or consolidating debts into a single loan with a lower interest rate or negotiating with creditors to lower interest rates and create a manageable repayment plan. 

Once a person has clarity on which stage of the debt journey, they are in they can seek professional advice and support. A debt relief counsellor can provide proper guidance, especially to borrowers who have fallen behind significantly on their debt repayments or are struggling to pay their loan expenses.

In short, achieving financial stability and becoming debt-free requires a proactive, realistic, and committed approach to making the necessary changes.

Q. Do you think the easy availability of loans and credit card debt coupled with BNPL culture would promote the debt culture in India?

Loans have become an integral part of our lives, and many individuals find themselves struggling with multiple debts. According to the Reserve Bank of India (RBI), outstanding personal loans increased by 84 per cent to 35.98 lakh crore in September 2022 from 19.55 lakh crore in September 2018. As the consumption side of the economy expands, so do borrowing and debt. 

The easy availability of credit and the prevalence of the buy now pay later (BNPL) culture contribute to India's debt culture. Many people are using BNPL schemes to purchase items like mobile phones and other consumables. Our estimates suggest that India has a total household debt of $1 trillion, with a default rate of 10 per cent, equivalent to $160 billion, and around $16 billion of debt in default.

While credit can be beneficial in some situations, it can also lead to individuals taking on more debt than they can realistically afford to repay. This can be especially true in a culture that emphasizes immediate gratification and consumption. Retail credit is growing at a rapid rate of 14 per cent CAGR, and the adoption of the BNPL technique has led to a significant increase in the total value of debt in India. Although credit availability is convenient for consumers, it can also encourage them to overspend and accumulate debt that they may not be able to repay.

Moreover, there is a lacuna of financial literacy and education among consumers in India, which can worsen the situation. Many individuals may not fully understand the long-term implications of taking on debt or the significance of developing a realistic budget and sticking to it. This is especially true for Indian Gen Z and millennials, who increasingly find themselves in excess debt due to a lack of financial awareness. 

Therefore, borrowers must be aware of their spending habits and seek financial education and guidance when required. This includes understanding the terms and conditions of loans and credit card agreements, knowing the actual cost of borrowing, and creating a practical budget and debt repayment plan.

Q. With so many lending apps and online lenders, how do interested borrowers assess their genuineness?

As the number of lending apps and online lenders in India increases, it becomes crucial for borrowers to evaluate their genuineness. With their high-interest rates and obscure fine print, fintech apps can easily trap borrowers in a never-ending cycle of debt. However, if one must opt for loans via these lending apps, it is important to exercise vigilance and conduct thorough research. Consider reading reviews and feedback from other customers to gain a holistic understanding of the lender's reputation and reliability.

Moreover, borrowers should carefully read the terms and conditions of any loan agreement, paying specific attention to the interest rates, fees, and any other charges associated with the loan. Lenders who are not transparent about these details or are hesitant to provide information should be avoided. It's also crucial to check if the lender is registered with relevant regulatory bodies like RBI and has the necessary licenses and approvals to operate in India.

Borrowers should also be wary of lenders who request upfront payments or deposits. Genuine lenders will not ask for any payment upfront, as they deduct all their fees and charges from the loan amount itself. Finally, borrowers should be cautious of lenders who do not conduct proper due diligence before approving loans. A genuine lender will take the time to assess the borrower's creditworthiness and ability to repay the loan before approving the loan. By following these guidelines, borrowers can better protect themselves from predatory lending practices and make informed decisions about their finances.

Q. The main problem while repaying debt is the interest burden. How do you suggest borrowers be quickly relieved of the same?

If you are struggling with toxic debt, it is essential to assess the nature of your debt to determine the best course of action. Once you have done that, you can explore debt consolidation, debt resolution or debt elimination through personalized repayment options to quickly relieve yourself of the interest burden on your debts.

Debt counselling may be necessary to receive advice on debt payments. Debt consolidation may be a suitable option for those who are current on their repayments but barely managing to pay, living paycheck to paycheck. With debt consolidation, a borrower can combine all high-cost debts into a single loan with a lower interest rate and an extended repayment term. It can provide immediate relief by reducing monthly obligations.

Debt elimination strategies such as the snowball or avalanche method may work for those who have run up a significant debt but are not facing financial hardship. However, for those who have fallen behind on debt repayments and are struggling, seeking guidance from a debt relief platform is recommended.

These platforms offer professional assistance and negotiate with creditors on your behalf to establish manageable repayment plans or potentially reduce the overall debt amount. Such programs are affordable and help borrowers overcome debt over a stipulated period, providing various options to achieve long-term financial freedom.

In addition to these options, borrowers can also consider making larger payments or paying off high-interest debt first. This can help reduce the overall interest burden and save money in the long run. It is important for borrowers to create and stick to a budget and avoid taking on any new debt while they work to repay their existing debts. By taking a proactive and disciplined approach, borrowers can effectively manage their debt and ultimately become debt-free.

Q. Does debt consolidation always help to get rid of the loans early?

While debt consolidation can simplify the repayment process and potentially reduce the interest burden, it does not always guarantee early loan repayment. Debt consolidation involves taking out a new loan to pay off multiple existing loans. While this can help reduce the overall interest rate and result in lower monthly payments, it is important to note that debt consolidation does not reduce the total amount owed. It may even lead to a longer repayment term, resulting in more interest paid over time in some instances.

Debt consolidation is an ideal option for borrowers who are current on their repayments but struggling to make ends meet. It can be beneficial for those with high-interest credit card debt or multiple high-cost loans. However, if the borrower has low-interest debts, consolidating them may not result in significant savings. Ultimately, whether debt consolidation is a favourable option really depends on the borrower’s unique circumstances and the nature of the debt.

Q. What are the popular myths that cause many people to fall into a debt trap?

There are several popular myths that can cause many people to fall into a debt trap. These include:

Believing that a higher number of credit cards leads to financial security. In reality, it can lead to overspending and higher debt.

Thinking that making the minimum payments on credit cards is sufficient. This is the biggest debt trap one can fall into due to the accrual of high-interest rates on revolving monthly balances, but it can result in long-term debt and high-interest charges.

Aligning with the popular myth that debt is necessary to achieve financial goals. While some debt may be necessary, it is important to carefully consider the terms and potential risks before taking on debt.

Believing that debt is easy to manage and can be quickly paid off, but it can spiral out of control easily and lead to financial hardship.

Q. How do you advise low credit score borrowers to avail of low-risk mortgage loans?

Although it is possible to obtain a mortgage with a bad or low credit score, borrowers in this situation will likely face higher interest rates and may need to provide a larger deposit due to the perception of higher risk by the lender. However, there are some customized home loans available for people with poor credit, and some lenders specialize in offering them. Low credit score borrowers can increase their chances of obtaining a low-risk mortgage loan by following a few key steps:

Focus on improving your credit score before applying for a mortgage. This can be done by paying bills on time, reducing credit card balances, and checking credit reports for errors.

Make a larger down payment to qualify for a low-risk mortgage loan. Saving for a down payment can help to reduce the lender's risk and improve the borrower's chances of approval.

Consider government-backed loans as it typically has more flexible credit and lower down payment requirements.

Explore options and shop around for lenders to find the best rates and terms. Some lenders may specialize in working with low credit score borrowers or offer alternative credit scoring models.

Add a co-signer with a higher credit score or income as s/he may be able to qualify for a low-risk mortgage loan.


Some of money lending mobile applications offer personal loans up to 5 lakh
First Published: 23 May 2023, 09:19 AM IST