Gen Z in a debt trap? How ‘Buy Now, Pay Later’ and EMIs are draining young wallets, experts warn

Rising dependence on personal loans, credit cards and 'Buy Now, Pay Later' (BNPL) schemes among Gen Z and young earners is becoming an alarming trend, financial experts warned during a financial conversation with Zee Business, urging greater discipline in spending and borrowing habits.

Hemant Rustagi, CEO of Wiseinvest, and mutual fund expert Vishwajeet Parashar explained how easy credit availability leads young people to create dangerous debt situations.

Situation ‘alarming but manageable’

Add Zee Business as a Preferred Source

Rustagi described the early earning years as a 'precarious stage' where financial mistakes are common. He noted that young professionals typically start with lower incomes while facing rising lifestyle aspirations and peer pressure.

“Income is at its lowest level at the beginning of a career, but expenses often become unmanageable due to lifestyle choices, social media influence, and easy availability of loans,” he said.

He explained that personal loans appear manageable when broken into EMIs, but multiple small borrowings can accumulate quickly. Studies show that a significant proportion of borrowers under 25 are taking loans for expenses rather than asset creation, which he called a worrying sign.

“When expenses exceed income and borrowing becomes habitual, that is the beginning of a debt trap. The situation is alarming but still manageable,” Rustagi added.

40–45% EMI threshold a red flag

Parashar pointed out that credit has become extremely convenient, with loan offers just a click away. He said the biggest driver of borrowing is convenience combined with rising aspirations.

“Seventy per cent of iPhones are bought on EMI. The problem is that people are unable to differentiate between wants and needs,” he noted.

He advised that EMIs should not exceed 40–45 per cent of monthly income. “If you cross that limit, it’s a warning sign,” he said.

Parashar also suggested practical steps, such as:

• Avoiding emotional purchases
• Waiting before making big buying decisions
• Trying a 'no credit' month to understand spending patterns
• Dividing income into three buckets: household expenses, EMIs, and future wealth creation

He stressed the importance of financial literacy and responsible borrowing, warning that taking new loans to repay old ones is a dangerous cycle.

What are the warning signs of a debt trap?

Rustagi identified key red flags that indicate financial distress:

• More than 40–50 per cent of income going toward loan repayment
• Paying only the minimum due on credit cards
• Taking fresh loans to repay existing debt
• Lack of an emergency fund

“A debt trap doesn’t happen overnight. It’s a series of small mistakes over time,” he said, adding that early realisation and corrective action can prevent long-term financial damage.

What did the experts recommend for investment strategies?

During the financial talk, the experts also responded to investor queries.

For a young investor targeting Rs 75 lakh in 15 years with a Rs 12,000 monthly SIP and a Rs 95,000 lump sum investment, Rustagi recommended consolidating the portfolio. The investor held 14 funds, which he described as excessive for a single goal.

He advised reducing the portfolio to around five well-diversified equity funds across large-cap, mid-cap and small-cap segments. He added that assuming a 12 per cent annual return, the target corpus is achievable, but inflation must be factored into long-term planning.

He recommended that investors check their asset distribution, while they should decrease their investment overlap in large-cap funds and they should explore value or contrarian investment methods while maintaining control over their thematic and international fund investments according to their risk tolerance.

Start small, stay disciplined

In response to a query on investing Rs 2,000–Rs 5,000 per month, Rustagi advised beginning with Rs 5,000 if possible and investing in diversified equity funds for long-term goals of eight to ten years or more.

“Consistency and discipline are key. Increase SIP contributions gradually to benefit from the power of compounding,” he said.

The experts concluded that while credit can be a useful financial tool, irresponsible borrowing driven by lifestyle pressures can lead to long-term financial stress. Discipline, budgeting, and clear financial goals remain the most effective safeguards against falling into a debt trap.