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Gen Z is entering adulthood in a world of instant credit — BNPL apps, student loans, credit cards and microloans. Yet, many first-time borrowers lack basic debt literacy: the knowledge to understand interest rates, credit scores, and repayment terms. Learning this early prevents future debt traps.
Why Debt Literacy Matters for Gen Z
Early Habits Stick: Your first loan sets the tone for future borrowing.
Credit Score Foundations: Timely repayment builds a good credit history.
Avoiding Debt Traps: Understanding hidden charges and APRs helps you say no to bad deals.
Key Concepts to Know Before Your First Loan
Interest Rate vs. APR
The interest rate is the cost of borrowing; the APR (Annual Percentage Rate) includes all fees and charges. Always compare APRs between lenders.
Credit Score & History
Your CIBIL or Experian score reflects your repayment behavior. A higher score means easier approvals and lower rates.
Secured vs. Unsecured Loans
Secured loans (like car or education loans) are backed by collateral. Unsecured loans (like credit cards) usually have higher rates.
Repayment Terms
Check the tenure, EMIs, prepayment options, and penalties. Long tenures lower monthly EMIs but increase total interest paid.
Hidden Charges
Processing fees, insurance add-ons, late payment penalties — read the fine print.
Debt-to-Income Ratio
Keep your total EMIs below 30–40% of your monthly income to stay financially healthy.
How to Build Debt Literacy
Take small loans and repay them on time to build credit history.
Use RBI-registered lenders and verify on official portals.
Read loan agreements carefully; don’t hesitate to ask questions.
Use online loan calculators to compare options.
Benefits of Being Debt-Literate
Better financial security
Access to lower interest rates
Freedom from debt stress
A stronger personal finance foundation for life
Conclusion
For Gen Z, knowledge is the best credit score. Understanding debt before borrowing ensures you use credit as a tool — not a trap.
FAQ Section
Q1. What is the best age to start building credit?
As soon as you have stable income, but start small and repay on time.
Q2. How can I check my credit score for free?
Through CIBIL or Experian websites once a year, or via certain banking apps.
Q3. Is BNPL (Buy Now Pay Later) a loan?
Yes. It’s a short-term credit facility and affects your credit history.
Q4. What percentage of my income should go to EMIs?
Ideally less than 30–40% to stay comfortable.
Q5. How do I spot a predatory lender?
Look for high APRs, unclear terms, or apps not registered with the RBI.
Published on : 18th September
Published by : SMITA
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