Ever Wondered Why We Borrow More Than We Can Comfortably Repay?

I've often sat with friends, family, and clients, listening as they shared stories of debts they wished they hadn't taken. It's a common scenario – feeling confident when borrowing, only to later feel burdened by repayments.

Perhaps you've experienced this too, eagerly signing up for an EMI for a new phone or funding a lavish celebration. But why do we repeatedly borrow more than we comfortably repay? 

Emotional Triggers Driving Our Borrowing Habits

Our emotions significantly influence our borrowing decisions, often more than logic itself. Social pressures subtly push us to match the lifestyles we see around us. For instance, seeing friends purchase the latest gadgets or cars can stir feelings of inadequacy or FOMO (Fear of Missing Out), nudging us toward similar purchases, even if they're not financially prudent.

Additionally, our culture strongly promotes instant gratification, making expensive items seem accessible through convenient EMI options. We tend to overlook the total repayment amount, focusing instead on manageable monthly instalments. A ₹50,000 smartphone might seem affordable at ₹3,000 per month, but interest payments could push its actual cost significantly higher.

Moreover, emotional states like stress, comparison, and self-worth play critical roles. Many of us might borrow to host extravagant weddings or buy expensive items, driven more by societal expectations than actual necessity. These emotional decisions can lead us into long-term financial strain without realizing it.

Cognitive Biases That Influence Our Financial Choices

Our minds naturally harbor cognitive biases that subtly mislead our financial judgments. The "Present Bias" makes us value immediate rewards far more than future costs. For example, buying a ₹1 lakh scooter might feel instantly rewarding, but the accumulated interest over EMIs could inflate the total cost to nearly ₹1.5 lakh.

Another bias, the "Optimism Bias," tricks us into overly positive expectations about our financial future. We often believe future earnings or promotions will easily cover large debts, such as confidently taking a ₹10 lakh loan for a wedding without a concrete repayment plan.

The "Anchoring Effect" is yet another cognitive bias, wherein EMI calculators anchor us to comfortable monthly repayment figures. This focus on manageable monthly payments distracts us from the overall repayment, which can be substantially higher. Understanding these emotional triggers and cognitive biases can help us make better-informed financial decisions. 

Navigating India's Easy-Credit Ecosystem

In today’s India, accessing credit has become incredibly simple – perhaps even too simple. Credit cards, personal loans, loans against mutual funds, and quick-app loans are now available almost instantly.

However, easy access doesn't always translate into wise borrowing. It's crucial to pause and consider whether the convenience aligns with your long-term financial health.

The Unseen Consequences of Over-Borrowing

Borrowing beyond comfortable limits can quickly spiral into financial distress, something I’ve seen repeatedly among individuals who underestimated their obligations. One immediate consequence is the EMI trap, where multiple EMIs heavily burden your monthly finances. 

Such strain often forces people to liquidate their SIP investments or prematurely withdraw funds from essential savings like Public Provident Funds (PPF), negatively impacting their financial security. Moreover, excessive borrowing and missed repayments inevitably hurt your credit score. A low score can severely limit your eligibility for better loans, trapping you in a cycle of expensive credit. 

To prevent this, tools like Quicklend’s EMI Calculator or Loan Against Mutual Funds calculator can guide you in planning responsibly, clearly showing potential repayment schedules and obligations.

Practical Steps Towards Responsible Borrowing

Borrowing responsibly begins with clearly defining your purpose for taking a loan – is it for emergencies, housing, education, or just lifestyle upgrades? Distinguishing essential needs from wants is vital.

Next, stress-test your financial commitments. Assume worst-case scenarios, such as higher-than-expected interest rates or slower salary increments. Tools provided by Quicklend, such as their EMI and LAMF calculators, can help you visualize and understand the actual costs involved, ensuring that you make informed borrowing decisions.

Additionally, consider options that use collateral, such as a Loan Against Mutual Funds, rather than high-interest personal loans or credit card debts. Collateral-backed loans typically offer better terms, making them a smarter financial choice.

Your Quick Checklist Before Taking a Loan

Before signing any loan agreement, ask yourself a few simple yet critical questions:

• Is this loan truly necessary, or am I falling into lifestyle inflation? 
• What is my contingency plan if financial circumstances change unexpectedly? 
• Could pledging mutual fund assets be a better option than high-interest debt?

If doubts persist, don’t hesitate to reach out to Quicklend’s support or explore our Learning Centre for in-depth guidance.

You’re Not Alone – We're Here to Help

Financial decisions, especially those related to borrowing, don’t need to be daunting. By understanding the psychology behind borrowing, using financial tools responsibly, and consistently questioning your motivations, you can make smarter financial decisions. 

At Quicklend, our goal is to help you navigate your borrowing choices wisely, ensuring that you achieve financial peace of mind. Remember, you don’t have to figure this out alone – we're here for you every step of the way.

This is general guidance. For personalized loan advice, please contact our team at Quicklend.