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Almost 15% of the survey respondents use more than 50% of their income to pay EMIs. This poses a serious threat to their long-term financial well-being.

32% of the respondents with an EMI outgo of more than 50% are senior citizens. For retirees living on a fixed income, this is particularly high.

Close to 9% of the respondents have fixed obligations to income ratio (FOIR) of more than 70%.

20% of the respondents with FOIR of over 70% had annual income of less than Rs 12 lakh—not surprisingly, relatively lower income groups find it hard to save.

About 4% borrowed more than thrice over the past year.

19% of the respondents who have borrowed at least thrice over the past year earn less than `12 lakh a year, making them susceptible to debt traps.

Over the past year, 21% of the respondents borrowed at least once to repay a loan.

27% of the respondents who have borrowed at least once over the past year to repay a loan are below 30. The young need to be cautious of this dangerous practice.

Some 9% of the respondents withdrew cash from credit cards over the past year.

14% of the respondents who used credit cards for cash withdrawal happen to be senior citizens. At 12%, those below 30 form the next large group.

Around 21% of the respondents either defaulted on payment or rolled-over their debt by paying just the minimum due amount.

29% of the respondents who missed at least one credit card payment over the past year earn less than Rs 6 lakh annually.

Loan applications of 5% of the survey respondents were rejected by banks.

22% of the respondents whose loan applications were rejected last year earn less than Rs 12 lakh. Higher rejections in this group can be attributed to their higher FOIR and higher loan roll-overs.

Some 3% of the respondents have missed payments at least thrice over the past year.

6% of those who missed payments at least thrice last year are below 30. Youngsters should know that this has a bearing on their credit scores.

Some 16% of the respondents have spent money anticipating a bonus or an increment.

18% of the respondents who based their expenditure on expectations of a higher future income are below 30.

About 24% of the respondents have taken loans with rising EMI feature.

50% of the respondents with rising EMI loans fall in the 30-60 age group. Risng EMIs are not suitable for those above 45.

Almost 25% of the respondents have bought electronic gadgets on EMIs.

70% of the respondents who bought electronic goods on credit fall in the sub-Rs 12 lakh annual income group.

For a large section of people, particularly the salaried class, debt is unavoidable. However, borrowing irresponsibly can land you in trouble. According to an ET Wealth survey, 15% of the respondents have an EMI outgo of more than 50% of their income. The survey was conducted in March and had 2,042 respondents from across the country, age groups and income levels.Surprisngly, 32% of the respondents with EMIs of more than 50% are senior citizens—people who have fixed incomes. The survey also showed that one out of five respondents have taken loans to repay existing loans in the the past one year. Taking a loan to repay another is a classic indicator of falling into a debt trap.In this week’s cover story, we explore warning signs that could show whether you are headed towards a debt trap. “Debt is not a bad thing. But you need to plan properly, so that you don’t get into a debt trap,” says Manav Jeet, MD and CEO, Rubique, an online marketplace for financial products.Sudden events like a job loss, a medical emergency, etc. can force one to borrow beyond one’s repayment capacity, says says Vinod N. Kulkarni, a financial counsellor. “Salaries getting delayed has also become a major factor leading people into debt traps as they try to survive on credit cards,” adds Arun Ramamurthy, Founder, Credit Sudhaar. These sudden shocks can be avoided by maintaining a contingency reserve of around six months’ income and having insurance.But it is often the slow, gradual slide into a debt trap that can prove more dangerous as it goes unnoticed till the person is neck deep in it. We point out the red flags, so you can take corrective measures, if need be.A lot many people fall prey to ‘ easy EMIs ’, ‘discounts’, and ‘sales’. Compulsive spending can strain your finances and push you towards a debt trap. “Some or the other sale will always be on and people who can’t control themselves often end up buying things on EMIs. Though these standalone EMIs may not be big, when you add the various EMI obligations, you may have little money left to spend on other things,” says Ranjit Punja, CEO, CreditMantri.If your EMI outgo exceeds 50% of your salary, it’s a big red flagWhile there is no fixed cut off for an acceptable EMI outgo, most experts advise that it should be less than 50% of one’s monthly income. Most banks restrict lending to avoid a person’s EMI outgo to go beyond the 50%. Besides fixed EMIs, you also need to account for the repayment of soft loans, taken from friends or family. “Your EMIs and other loan repayments should not take more than 50% of your income,” cautions Jeet.EMI is only a part of one’s fixed obligations. There are several other fixed expenses— rent, society maintenance charges, kids’ school fee, etc. “Ideally, the fixed obligations-to-income ratio (FOIR) should not be more than 50%,” says Punja.Fixed obligations shouldn’t cross 70% of monthly incomeRamamurthy concurs with this view: “While 50% is ideal FOIR, it may not be possible for all. However, crossing the 70% mark is an early warning that one may be sliding into a debt trap.” Experts insist on the 70% mark because people need at least 30% of their monthly income to meet other expenses and save for financial goals.If you often find yourself borrowing money to meet regular expenses, you need to set your house in order. “If you have to borrow regularly to meet routine expenses—rent, kids’ school fees, etc.—you may be sliding into a debt trap,” says C.S. Sudheer, CEO and Founder, IndianMoney.Borrowing money more than thrice in a year spells dangerKulkarni concurs: “People fail to control their expenses will end up borrowing even for routine expenses, hoping that they will pay it back. However, this is a bad strategy and increases the chance of falling into a debt trap.”Borrowing money to repay a loan, unless it is aimed at reducing one’s interest outgo— as in the case of changing one’s home loan lender—is a worrying sign. Another worrying sign is the way people deal with their fixed obligations.Borrowing to repay a loan can be a costly mistake“Among the fixed obligations, people usually don’t default on home loan and car loan EMIs, or on payments like rent, school fees, etc. because of social pressures. Instead, they start using credit card extensively and try to tide over the credit card bills by paying just the minimum due amount,” says Ramamurthy. This is why cash withdrawals and rollover of credit card dues is unacceptably high for a lot many people.While borrowing for regular expenses to repay loans is bad, doing that with the help of credit card is a sure way of getting oneself into trouble. “Even if you want to borrow, decide on the kind of debt. Using the credit card route should always be avoided,” says Jeet.Shun cash withdrawals using credit cardsDrawing cash via credit card invites a chunky cash advance fee—2.5%-3.5% of the withdrawn amount per month. Annually, the interest works out to be 35%-50%.Not clearing the credit card dues in full is a huge red flag. Our survey shows that this practice of not paying the credit card bill in full is quite rampant. Almost 21% of the respondents have either missed the credit card payment or rolled it over by paying the minimum due amount over the past year.Missing payments compromises your credit scoreOften people don’t realise how costly such rollovers can be. “Since the minimum amount payable is quite low, people usually fall into this trap. The real problem of this carry forward is the high interest rate (around 3% per month),” says Punja.“Since the interest on credit card loans is very high, rolling it over reduces one’s repayment capacity for other loans and, if continued, for long, it will push you into a debt trap,” says Ramamurthy. If you have got into this rollover trap, getting out of it should be your top priority. Postponing it will only worsen the problem.“Treat getting out of revolving credit as your first priority and redirect all surplus towards this end,” says Melvin Joseph, Founder, Finvin Financial Planners. You can also utilise some of your investments, particularly, if they are not linked to specific goals, to get out of the rollover trap. If you still cannot pay the credit card dues in full, you should get the credit card outstanding transferred to a lower-cost loan.Our survey reveals that banks have rejected loan applications of 5.4% of the respondents. “Banks rejecting your loan application is a dangerous sign, especially, if it is done because of the fall in your credit score,” says Sudheer. Though the credit score ranges from 300 to 900, only scores above 750 are considered good by most banks.Bad credit score leads to rejection of loan applicationThough some NBFCs lend to people with lower credit ratings, they usually charge a higher interest rate. As a precautionary step, you should check your credit score once in a while and make sure that you take steps to improve it. “The credit score for individuals is like the credit rating for companies, and they should make efforts to keep it high,” says Jeet. Even senior citizens should not ignore their credit score. “Even for retirees, the credit score is important because they may have to take loans in the future in case of an emergency. Also, the credit score will come into play if you choose to be a co-borrower or guarantor for, say, your children’s loans,” says Joseph.Missing utility bills once in a while is not a warning sign. However, if you are frequently missing paying utility bills, you maybe spending beyond your means, and it’s a red flag. It also indicates lack of financial literacy—the fact that this will impact your credit score and may keep you away from lowcost funding options.Missing bill payments shows lack of disciplineOur survey shows 6% of those below 30 have missed paying utility bills on time at least thrice in the past year. This shows youngsters’ lack of awareness on the role of utility bill payments in the calculation of credit scores.If you decide to take a loan now and aim to repay it when you get a fancy bonus later this year, you may be in for trouble. “People always hope for the best and don’t factor in possible problems that may emerge in the future. So, borrowing based on current salary is fine, but not on expected bonus, increments, etc,” warns Jeet.Spending now anticipating a bonus or an increment in the future is not prudentPeople also need to distinguish between the fixed and variable components of their salaries, when calculating the EMIs they can afford. “Consider only the fixed pay as your salary and your EMI should not be more than 50% of this fixed pay,” says Ramamurthy.Many people tend to overestimate the future salary increments. Since the base is small, increments are higher at the start of one’s career. So, assuming that you will get the similar increments till you retire to take larger loans may not be a prudent strategy. Banks also encourage such unhealthy habits by offering loan products where the EMIs increase with time, usually after a gap of a few years.Loans with rising EMIs may harm your financial securityAs most people take floating rate home loans, they should also be ready for sudden spikes in EMIs due to increase in interest rates. “People should factor in 20% increase in EMI due to rise in interest rates and have some contingency funds earmarked for their loan repayment also,” says Vineet Jain, Cofounder and CEO, Loanstreet.Several people tend to be impulsive shoppers, and even end up buying non-essential items on loans. Loans from financial institutions come with ‘easy EMIs’ and many of the NBFCs are now located within the shopping complexes selling consumer durables, making it easier for consumers to borrow. But though these loans are floated with features like ‘easy EMIs’, they come with high interest rates—18-25%.Buying non-essential goods by taking loans is a strict no-noEMI offers from credit cards can also be quite expensive. “People get into the problem because most credit card companies allow one-time purchase, above a certain amount, to be converted into an EMI. Immediate loan facilities like this can force you to stretch your finances. Due to the ‘sales’, this problem (of easy EMIs) usually gets exaggerated during festive seasons,” says Punja.(Data analysis by Sameer Bhardwaj)