'Borrowed Too Much...' Zerodha's Nithin Kamath On Instant Pre-Approved Loans

Nitin Kamath, the founder and CEO of Zerodha who is widely respected for his insights on financial planning and investment, has raised concerns about the growing trend of individuals relying excessively on instant loans. With the increasing availability of quick and easy credit through digital lending platforms, Kamath believes many people are borrowing more than they can afford to repay, leading to potential financial instability.

"After the pandemic, there's been a big increase in personal loans and credit card borrowings. The good side of this is the deepening of credit, but the bad side is some people seem to have borrowed too much or borrowed despite not being able to afford it. A lot of these are small ticket loans under Rs 10,000 from fintech apps. I wonder how much of this is due to the incessant spam from these loan apps nudging people to take "instant pre-approved" loans," Kamath stated in his Twitter Post. 

The allure of instant loans

Instant loans, often marketed as quick solutions for cash flow issues, have become increasingly popular. These loans offer minimal paperwork, rapid disbursal, and no collateral requirements, making them attractive to individuals in urgent need of funds. However, Kamath highlights the downside: high interest rates, hidden fees, and the risk of over-borrowing.

"The defaults among this segment that can't afford to take loans are starting to increase. This data is from CRIF. These delinquencies started to show up in the numbers of banks and NBFCs a couple of quarters ago. So yeah, we'll get to know the true extent of the problem in the next couple of quarters," added Kamath. 

Kamath has often expressed concern over the growing trend of individuals relying on personal loans to fund discretionary expenses. He points out that the availability of instant loans through apps and digital platforms has made it tempting for people to borrow without fully understanding the long-term consequences.

"The lowest hanging fruit and the most bang for your buck thing you can do with your personal finances is to pay off all your high-interest loans, including credit cards. If you are in debt, the psychological effects will show everywhere from your personal life to your workplace. Ensuring you get out of debt has to be the first thing you do even before you save and invest," his tweet further added. 

Borrowing for the right reasons

One of Kamath’s key messages is to borrow only for essential purposes or investments that generate value, such as education or health emergencies. He discourages taking loans for non-essential purchases like luxury gadgets, vacations, or lifestyle upgrades, which can lead to a cycle of debt.