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25% of Indian Households Spend a Quarter of Their Income on EMIs

  //business-finance.news-articles.net/content/202 .. lds-spend-a-quarter-of-their-income-on-emis.html
  Published in Business and Finance on Monday, December 8th 2025 at 5:11 GMT by Business Today

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The Hidden Cost of Borrowed Lifestyles: Why Up to a Quarter of Your Income Is Slipping Into EMIs

In a recent piece published on Business Today, Chartered Accountant (CA) Arun Sethi warns that a staggering 25 % of Indian households are spending a quarter of their income on Equated Monthly Installments (EMIs). This hidden cost of borrowed lifestyles, Sethi argues, is silently eroding financial resilience across the country. Below is a comprehensive summary of the article’s key findings, the underlying drivers of this trend, and practical steps that borrowers can take to regain control.

1. The Anatomy of the “Borrowed Lifestyle”

The article opens by defining what the author terms a “borrowed lifestyle.” It is a pattern in which consumers, rather than living within their means, finance everyday purchases and large‑scale commitments through credit products such as:

Adding up these expenses, many families find themselves allocating a substantial chunk of their disposable income to pay off the same principal repeatedly over months or years. The article cites a study by the Reserve Bank of India (RBI) that shows the average household spending on EMIs has increased by 12 % year‑on‑year.

2. The “Hidden Cost” That’s Harder to See

Sethi stresses that interest rates, late‑fee charges, and collateral‑related penalties add up over time. The article provides a breakdown of how the cost of borrowing escalates:

• Interest over the life of a loan: For a ₹3,00,000 personal loan at 12 % per annum over 3 years, the interest paid totals roughly ₹52,000 – more than the principal itself.
• Late‑fee charges: The article cites data that late‑fees average ₹200 per missed EMI. Over a year, a borrower missing even five EMIs can incur over ₹1,000 in extra costs.
• Collateral and insurance: Certain credit products require borrowers to purchase additional insurance or offer collateral, adding another layer of expense.

These hidden costs are often invisible in the day‑to‑day budgeting sheet, creating a “creeping debt” that borrowers fail to account for until it becomes unmanageable.

3. Why 25 % of Income Is an Alarming Threshold

The CA references a financial‑health guideline that suggests an EMI burden should not exceed 30 % of net monthly income. Sethi notes that when a household spends 25 % or more on EMIs, it’s flirting with financial distress:

• Cash‑flow risk: A sudden reduction in income (e.g., job loss) can leave borrowers unable to keep up with EMI payments.
• Opportunity cost: Money that goes into EMIs can no longer be saved or invested, preventing wealth accumulation.
• Default risk: The article links a 2019 RBI study showing that households above the 25 % threshold have a 2‑fold higher likelihood of default.

The CA emphasizes that this is a symptom of a deeper cultural shift toward instant gratification and credit‑based consumption.

4. Root Causes of the Debt Surge

The article identifies several systemic and behavioral factors:

1. Credit‑bureaus’ aggressive marketing: A surge in targeted offers through WhatsApp, e‑mail, and SMS.
2. Lack of financial literacy: Over 60 % of Indian adults are not aware of how EMIs are calculated or the long‑term cost of borrowing.
3. Inadequate regulation: Though RBI has issued guidelines on “Responsible Lending,” enforcement at the local level is weak.
4. Lifestyle inflation: As incomes rise, so do living expenses, leading to a cycle of borrowing just to maintain status quo.

5. Policy and Institutional Responses

The article points out several RBI initiatives that aim to curb the crisis:

• Rural Credit Policy: Enhances access to low‑interest micro‑loans for rural households, thereby reducing the reliance on high‑cost personal loans.
• Credit‑Bureau Reform: Encourages the consolidation of credit information and stricter debt‑to‑income ratio checks.
• Financial Literacy Campaigns: The Ministry of Finance’s “Money‑Sense” program is rolling out workshops to educate consumers on budgeting and debt management.

Sethi cites a quote from RBI Governor Shaktikanta Das, who says that the RBI will “tighten the credit environment for high‑risk borrowers while ensuring easy access to credit for productive sectors.”

6. Practical Ways to Reduce the EMI Burden

The article provides a 4‑step action plan for borrowers looking to reduce the 25 % burden:

1. Audit Your Finances
   - Track every EMI in a spreadsheet or an app like Walnut. - Compare the total with net monthly income; if it’s above 25 %, you’re in danger.

2. Prioritize High‑Interest Debt
   - Focus on clearing personal loans and credit‑card balances first, as they typically carry higher interest rates. - Consider a debt‑consolidation loan at a lower rate.

3. Build an Emergency Fund
   - Aim to save 3–6 months’ worth of expenses in a liquid savings account. This cushion can keep you afloat during income shocks.

4. Re‑evaluate Lifestyle Choices
   - Switch from a “borrowed lifestyle” to a “saving lifestyle.”
   - For example, replace a daily coffee from a café with a home‑made version, or consider a second‑hand vehicle rather than a brand‑new model.

7. Looking Forward

Sethi concludes by noting that the trend of high EMI reliance is unlikely to disappear overnight. However, a combination of personal budgeting discipline and policy enforcement can mitigate the risks. He cautions that “borrowers who ignore the hidden costs of EMIs are trading short‑term comfort for long‑term uncertainty.”

The article’s central takeaway: If you’re spending a quarter or more of your income on EMIs, you are on a precarious financial path. Taking proactive steps now—tracking debt, consolidating loans, building reserves, and adjusting consumption habits—can help restore stability and set the stage for future wealth creation.

8. Further Reading

The article also links to a few related pieces that provide additional context:

• “The RBI’s New Credit‑Bureau Guidelines: What They Mean for Everyday Borrowers” – offers a deeper dive into regulatory changes.
• “Why Your Credit‑Card Balance Is Costing You More Than You Think” – explains the mechanics of credit‑card interest.
• “Financial Literacy in India: A Call to Action” – highlights national initiatives to improve consumer education.

These resources round out a holistic view of the problem and potential solutions.

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