Good Debt vs Bad Debt: Understanding the Difference .
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Debt is not inherently bad. What ruins people financially is taking the wrong kind of debt for the wrong reasons. In India, debt is often misunderstood—some people avoid it completely, while others drown in it without realizing the consequences.
To manage money intelligently, you must understand the difference between good debt and bad debt.
What Is Debt, Really?
Debt is simply borrowed money that must be repaid with interest.
The key question is not “Is debt bad?” but:
Does this debt help me grow financially or slowly destroy my income?
What Is Good Debt?
Good debt is debt that:
Helps you increase income
Builds long-term value
Improves your future financial position
Common Examples of Good Debt in India
Education Loan
If the education increases your earning potential (engineering, medical, professional skills), it can be good debt—only if the cost matches realistic income outcomes.
Home Loan (Primary Residence)
A home loan builds an asset and protects you from rising rents. It also offers tax benefits. However, an overpriced house can turn “good debt” into bad.
Business Loan
If the loan helps generate profits or scale a business with proper planning, it qualifies as good debt.
Skill Development Loan
Courses that lead to employable skills or higher income can justify borrowing.
Key Point
Good debt has a return on investment (ROI) that is higher than its interest cost.
What Is Bad Debt?
Bad debt is debt that:
Funds consumption, not growth
Loses value over time
Creates long-term financial stress
Common Examples of Bad Debt in India
Credit Card Debt
Used for lifestyle spending and paid late, credit cards charge 30–45% annual interest. This is one of the worst forms of debt.
Personal Loans for Lifestyle
Borrowing for phones, vacations, weddings, or gadgets provides no financial return.
Buy Now, Pay Later (BNPL)
Marketed as “easy” but encourages overspending and short-term thinking.
High-Interest App Loans
Instant loan apps trap borrowers with high interest and penalties.
Key Point
Bad debt takes money out of your future income with nothing valuable in return.
The Interest Rate Trap
Many people judge debt only by monthly EMI. This is a mistake.
A small EMI over many years can mean huge interest
High-interest debt compounds against you
Convenience hides long-term damage
If interest is working against you, the debt is likely bad.
Grey Area: When Good Debt Turns Bad
Even good debt can become bad if:
You borrow more than you can afford
Income projections are unrealistic
There is no emergency buffer
The asset does not generate expected value
Example:
An education loan for a low-demand degree or a home loan beyond affordability can become financial burdens.
How to Decide: Good or Bad?
Ask yourself these questions before taking debt:
Will this increase my income or net worth?
Is the interest rate reasonable?
Can I repay comfortably even if income drops?
Does this solve a long-term problem or a short-term desire?
If the answer is unclear, it is probably bad debt.
Final Thoughts
Debt is a tool, not a villain.
Used correctly, it accelerates growth.
Used carelessly, it locks you into years of stress.
The goal is not to avoid debt—but to avoid stupid debt.
Smart people don’t ask “Can I get this loan?”
They ask “Should I?”