Ensure financial stability before opting for zero-interest EMIs, says Raj Khosla (2024)

A lot of millennials and Gen Zs take loans to fund their weddings. What's your view on that? What are some of the things that they should keep in mind before taking a loan to fund their wedding and how should they go about it?

Spending large sums of money on weddings is one trend that is clearly defined by the ‘want’ rather than the ‘need’ aspect of consumerism. Given the importance of the event and societal pressures, millennials and GenZs are ready to start their loan journey now more than ever.

However, it's crucial they weigh the long-term financial implications. Here are some tips:

First, set a realistic budget. Before you venture into the unknown, it's always good to have a budget. This will help you decide on a number beyond which spending or borrowing will not happen. By doing this, you not only safeguard yourself towards unwanted hefty EMI repayments but you will also be prepared to deal with the situation in a better way as you are within your achievable spending limits.

Second, be mindful of the loan terms. When you decide to go for a wedding loan, you must first compare and then find out the best loan terms and conditions made available to you from different sources. Compare things like interest rate, repayment tenure, pre-closure penalties and anything that can affect your overall experience with the loan.

Third, define your future financial goals. Having a debt of any kind takes a toll on your savings. You need to be aware of your future goals which require good financial stability like getting a house, moving to a new city, starting a family etc. When you have identified your future engagements then it becomes easier to go for a loan.

Many Gen Zs also take EMIs to buy phones and other purchases. Later, it becomes a habit for them and they land in a debt trap. What's your take on it and what are some of the things that they should be aware of before taking a zero-interest EMI?

Yes, it is a very common trend as per the credit bureaus, especially in case of a new to credit population. Taking EMIs to buy things that they ‘want’ may give them immediate respite in terms of a reduced amount but monthly it is going to erode a chunk of their salary as well. By the time people realise they have already fallen in the debt trap, it becomes too late.

Here’s what they should consider before taking a zero-interest EMI:

First, understand the borrowing costs involved. One needs to be very clear on all the necessary terms and costs involved while going for a zero-interest EMI. Sometimes, there are certain charges which end up making the whole deal not so lucrative but the consumer still falls for it as they didn’t do the due diligence properly.

Second, check whether it is a need or want. Needing a phone is one thing but going to buy the latest model of a particular brand is another thing. One is a necessity where your goal is to connect and communicate while the other one is more of a luxury which you coax yourself into purchasing. Have a better understanding of your situation and then decide what things you actually need. Wanting to buy luxurious stuff is not bad if the financial planning is done beforehand.

Third is financial stability. Make sure there is enough financial cushioning to pay for the EMI in case some emergency situation arises.

What are some of the things to look for in a credit card?

Choosing a credit card should be done purely on the basis of the objective or issue that you want to address. If you are a frequent traveller then a credit card that comes with traveller benefits like lounge access will be more suitable. If you are a shopper then cards giving good reward points can be suitable for you.

Let’s have a look at some things that you should look for in a credit card:

The first aspect is obviously fees and charges. Be it joining fees or annual fees, having clarity about this is foremost. On top of this, you must also know about various charges that come with the card.

The second is rewards and benefits. Assess the worth of any card by weighing your requirements along with the rewards and benefits that are being provided.

Third is interest rates. Check the relevant interest rates on your credit card. It can be for purchases, cash advances, and balance transfers etc.

The fourth aspect is the credit limit. How much credit limit is being provided to you by a particular lender is also important. If your shopping trends show you spending 30000 in a month then you need a card with at least Rs. 1 lakh credit limit. This also helps in maintaining your credit score.

Lastly, one can also check added perks. Some cards are promoted as specialist cards in a particular segment and they have some extra benefits corresponding to that category. For example, a travel card might offer you less forex fee while a rewards card will offer you 5x or 10x reward points.

It is important to weigh all these options before zeroing in on any particular credit card. Remember, it's only with a clear objective you will be able to find a suitable card as per your requirements.

We have heard that quite a few companies have cut down on benefits, increased the threshold on spending to access airport lounges, increased membership fees, etc. In this scenario, what should existing cardholders do?

There are a few things that you can do in case of a change in your credit card offerings.

First, reevaluate your cards. Review the benefits provided by the cards against the spending that is required to avail them. It will give you a fair idea of whether any card is actually helping you or only making you spend more. If perks have diminished but fees have increased, it might be time to look for a better option.

Second, negotiate with lenders. Sometimes, talking to your credit card issuer by leveraging your long-standing relationship with them can provide you with valid solutions that can take care of your requirements in essence, while also reducing the annual fee. For example, you can always switch to another card with the same lender which offers you a better deal in return for the money you spend.

Third, look at optimised usage of cards. Using a shopping-centric card for travel might not give you the desired results. It is essential to use cards according to their USPs.

Secured credit card is a good way to build credit history, especially for people who don't have access to unsecured credit cards. But not a lot of players are promoting it. What's your take on secured credit cards?

For people who are new to credit or are having low credit scores, getting a secured credit card gives them a chance to redeem themselves. The lender allocates you a credit card with a credit limit which is a certain percentage of the collateral you deposit with them.

Following are some of the aspects of secured credit cards:

Secured cards can be a very good tool for financial inclusion. People who are marginalised due to no or poor credit scores can finally start their credit journey. With a disciplined approach, you can also move towards unsecured credit cards once your credit score consolidates into a feasible range and lenders will have no problem in giving you premium cards that are offering lucrative benefits.

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Published: 08 Jun 2024, 10:36 AM IST