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Whether it is a salary advance from an innovative app, no interest instalment on your iPhone purchase or a credit card outstanding where you managed just the minimum amount due… don’t be fooled, you are essentially taking a loan. It may look like you are doing this at no cost, but a quick check into the finer details will reveal heavy costs.

What’s tempting about the salary advance is the low amounts – you can start with ₹1000 up to ₹2 lakh. But, do you know what it costs? Anywhere between 1% to 3% a month! That translates to an annual cost of 12%-36%. If this still doesn’t look too high – compare with your home loan interest which is roughly 8%-8.5% per year and your standard SBI fixed deposit which will pay you 6.25%-6.5% interest in one year.

While paying ₹10 or ₹20 a month on a ₹1000 loan doesn’t sound too bad at all, it’s the temptation and the false notion that you can afford the loan that you should be vary of.

The easy access to these loans makes you feel you can afford it whereas, in reality, you can’t. If they pile up, there will come a time when you won’t be able to repay and that’s when the monthly interest will begin to sting.

The same mindset applies to interest-free EMIs; if you have too many of those your monthly salary will start to fall short when it comes to repaying. Using a credit card too is okay till you can repay on time every month; interest costs start to matter when you have overspent and can’t fulfil payments.

Coming back to the original question – when do you really need that consumption linked personal loan? The answer clearly is – NEVER.

Buy what you can afford

Your first commandment should be to buy what you can afford. This does not include what your parents can afford; understand that they have worked to earn what they do; it shouldn’t automatically mean that those comforts belong to you as well. Work for your own comforts.

Spending half your monthly earnings on your weekend night outs and then getting your parents to pay your phone bills and air tickets only means you are depleting the wealth that they created – that too at an incrementally faster rate.

Eventually, when you have a family of your own and aren’t as easily swayed to dip into your parent’s kitty, you will struggle. Your lifestyle is not representative of what you can afford and hence, you will lean out for stretching your rupee with easy loans. In reality, you are not stretching your rupee, what you are doing is adding on debt and interest payment.

Bottomline – buy what YOU can afford.

Start saving

The second commandment really is an extension of the first. Only when you start spending what you can afford will you start saving. Plan, save, spend. You want that phone, save for a year and buy it. You want that vacation, again save and go. There is a feeling that one can have everything, gym memberships, vacations, expensive footwear, makeup products and weekend movies with popcorn without making any effort to save and build a pool of funds.

You will realise that in a few months of this kind of living, you are actually out of money. Saving is not hard. Start small with 10% of your salary in a month. Which means, if you earn ₹20,000 a month, save ₹2,000. After a year you would have saved ₹24,000 which is more than your one month’s salary.

Bottomline – start SAVING small, but start NOW.

There is no free lunch

Unfortunately, the lure of marketing is such that we forget to use common sense. Consumer finance companies or the companies that are actually lending you these tiny amounts every month are not doing so to help you out. Neither do banks give loans as a charity. They will do this business only and only if they can make money. They will make money when you pay interest and their strategy is such that eventually you will overspend and pay interest.

Don’t fall for the glossy ads nudging you to take that laptop on easy instalments; it stops being easy when you have three such instalments to pay. Majority of the advertisements out there will encourage you to spend more. However, stop and think, do you really need to spend more.

Using your credit card to buy that silk gown might make you feel like it costs nothing, but at the back of your mind, always remember that if you don’t pay that bill on time – the cost you pay is high. There are no free lunches. Cost isn’t just interest levied on delayed payments but also failed payments will reflect on your credit score. Watch this video. Which in turn means that subsequent loans even years later will offer your interest rates that are high, this will affect your cost of a home loan, car loan or any other emergency loan you may need.

Ten years later, when you are denied home loans at an attractive rate because you overspent trying you keep up with your work buddies, these simple mistakes and oversteps will come back to haunt you.

Bottomline – NO FREE LUNCH, your excess will cost you if not now, later in life.

These are not hard steps to follow, however, it does mean that you have to stop looking at which car your neighbour is driving or the dress that your colleague is wearing or the brand on your boss’s handbag.

Be your own person, set your own limits and limit yourself from becoming one more person bound by repayments and interest dues – STOP taking loans – you don’t need them!