The Importance of Financial Education in Responsible Borrowing

Are you borrowing money without understanding what you're signing up for? Let’s say you take a loan of ₹1,00,000. The EMI looks doable, right? But three years later, you’re still paying. The interest quietly keeps adding up. Most people don’t see it coming. 

That’s where financial education comes in. It’s not a luxury anymore; it’s a must-have skill, just like reading or writing. Yet, in India, only 27% of adults are financially literate.

Before you take that next loan, whether for a bike, phone, or your dream home, pause. It’s not just about repaying money. It’s about understanding how money moves, what interest does, and how repayment habits can make or break your future.

Know What You’re Borrowing – Not Just How Much?

Most people think of a loan in one line—"I will repay it monthly." But the loan isn't only about EMI. It's about interest, penalties, credit scores, future borrowing power, and peace of mind.

Basic Loan Calculation Example (India)

See what happens when you extend your tenure? Your EMI goes down, but you pay ₹20,000+ more.

Now imagine the loan is for ₹5,00,000. The interest hit would be even higher. These are not just numbers, they are months or years of extra work.

Many of us don’t know how compound interest works. It’s like adding fire to fire. And still, banks don’t always explain this clearly. They’ll show you “only ₹2,000 per month” banners. But that’s not the full story.

Common Loan Mistakes We Make

• Taking longer tenure for small EMIs (more interest paid)
• Not comparing different banks and NBFCs
• Borrowing more than necessary
• Skipping fine print
• Not checking the credit score impact.

Key Financial Technique: The 20-4-10 Rule

A simple rule used in many countries is now gaining popularity in India too:

• Put a 20% down payment
• Tenure not more than 4 years
• EMI should not exceed 10% of the monthly salary

This works well for car loans, mobile financing, or lifestyle credit.

Avoid the Trap – What Debt Feels Like?

It’s easy to enter debt. The offers are everywhere. But once you’re in, coming out can be painful.

A young person wins ₹2,00,000 in a quick online game. Feels smart. Plays again. Loses. Borrow to recover. That cycle goes on. Six months later, they owe ₹9,00,000. Pressure builds. Mental health crumbles.

Sounds extreme? It’s not rare anymore.

That’s why financial education should start in school. Kids should learn about interest, EMI, credit score, savings habits, and emotional spending.

EMI Burden Example

Life gets tough when EMI eats more than 25% of your salary. You start cutting on the basics. Many Indians are doing this, silently.

Hidden Costs of Easy Loans

• Foreclosure charges
• Processing fees
• Bounce charges
• Insurance loading

Most borrowers don’t even know these terms. That’s the real problem—not debt, but the blindfold.

Government and Banks Are Teaching—But Are You Listening?

India isn’t sitting idle. The push for financial literacy is already on.

Initiatives like Jan Dhan Yojana, RBI’s Financial Literacy Week, and NCFE workshops are progressing. However, the reach is still low in Tier 2 and Tier 3 cities. 

People take loans from mobile apps, not banks. They don’t read documents. They swipe, click, and fall into cycles.

Government-Led Literacy Programs

Still, only a small portion of India is using this knowledge.

Tips to Stay Out of Trouble

Let’s be real. Loans will stay. They're not the enemy. But misuse is. So here are strong habits every Indian must follow before signing any loan document.

Step-by-Step Borrowing Guide

Also, keep this simple trick in mind: Don't take loans for things that lose value over time. That means phones, gadgets, furniture, etc.

Use debt to build—like education, a home, or medical help—not to show off.

Conclusion

Money is emotional. Debt is even more. But finance is logic. You cannot treat emotions with logic unless you understand both. Financial education isn’t boring math. It’s life-saving math.

Borrowing is not bad. But blind borrowing is. Once you learn how loans work, how interest adds up, and how debt can mess with your peace, you’ll think twice before clicking “Apply Now.”

Learning this early can save you lakhs. It’ll help your family. Your peace of mind. Your future.

Don’t wait for a crisis to learn.

FAQs

1. How do I know if I can afford a loan?
You should check your monthly income and subtract all expenses. If the EMI is more than 20-25% of your income, it’s too high.

2. Does missing one EMI affect my credit score badly?
Yes. Even one missed EMI can reduce your score and hurt future loans. Always inform the bank before missing any payment.

3. What’s better, longer or shorter loan tenure?
Shorter tenure. You may pay higher EMI, but you pay less interest overall. Long tenure feels easy, but it's costlier in total.

4. Should I take loans from mobile loan apps?
Be careful. Many apps charge hidden fees and high interest rates. Check if the RBI approves them. If not, avoid.

5. Can I repay a loan early to save money?
Yes. But check for prepayment charges. Some lenders allow early closure without fees. Always ask before taking the loan.

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About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?