Debtonomics: an understanding of debt and its mechanics to help keep afloat

Debt, as we know, is the amount of monies borrowed by one party from another.

Debt as a term is also an acronym –

• D – Debt
• E – Earnest (Debt is availed with the sincere intention to repay)
• B – Burden
• T – Time (to be repaid within a specified period)

If this earnest (trust) is breached as a result of default in repayment of existing debt, the chances of availing new debt often reduce drastically.

Maths and Myth are two sides of Debt, two separate thought processes on each side of the ‘What IF’ wall.

The sky will not always be clear and there will be times when clouds spread across the sky, followed by rain. It is this time that the borrowers need to be prepared for this rainy day in any given situation. Remember to stay on the right side of the chart image, the SAFE ZONE.

It is easier to approach a friend, employer, or bank at an individual level and seek a loan, be it on a credit card, cash withdrawal, or finance asset purchase / school fees / expenses. However, such borrowing (debt) needs to be sustainable, backed by a source of income. Unless the THUMB RULE (even if tweaked) is followed, Individuals opt for excessive debt at times and fail to honor their repayment obligations, living in the myth that they will be able to avert from default, which may result in duress later. 

Lenders will not wait for recovery of the outstanding loan amount, and the least that an individual may expect is to default in servicing debt that may result in further consequences.

A Word of Caution: No one who lived through and is alive today can ever forget the year 2020 and the impact caused across the globe. The Central Banks across slashed interest rates, which was a sigh of relief for borrowers. Two years ahead, in 2022, we are already seeing signs that Central Banks may raise interest rates, which may lead to a rise in interest rates for loans as well. The increase in interest rates will lead to a higher obligation in terms of repayment of loans (considering additional interest) that the individuals should plan for.