Good Debt vs. Bad Debt: How to Make the Best Use of Borrowed Money

Understanding the Debt Dilemma in India

For a long time, debt has carried a stigma in Indian households. But times are changing. With increased financial awareness and access to structured credit, Indians are now beginning to see debt not as a taboo, but as a tool. The key lies in distinguishing between good debt and bad debt—a simple concept that can make or break your financial future.

What is Good Debt vs. Bad Debt?

Bad Debt

Bad debt usually refers to borrowing that funds non-essential, depreciating, or luxury expenses. These debts often come with high-interest rates and add little or no long-term value to your financial well-being. Examples include:

• High-interest credit card balances used for impulsive shopping.

• Expensive consumer durable loans for luxury items.

• Personal loans taken to sustain a lifestyle beyond your means.

This type of borrowing often leads to debt traps, increasing your debt-to-income ratio and financial stress.

Good Debt

Good debt, on the other hand, is strategic. It either helps you build a long-term asset (tangible or intangible) or reduces your overall debt servicing burden. Think of it as a financial stepping stone rather than a sinkhole.

Ask yourself two critical questions:

1. Will this loan help me build a valuable asset or skill?

2. Will it reduce my overall debt burden or improve cash flow?

If the answer is "yes" to either, you’re likely dealing with good debt.

Examples of Good Debt in the Indian Context

Home Loan (Mortgage Loan)

• Why it's good: A home is a long-term appreciating asset.

• Tax benefit: Interest payments qualify for deductions under Section 24(b) and Section 80C of the Income Tax Act.

• Impact: Reduces rent expense and enhances personal net worth.

Education Loan

• Why it's good: Builds intangible capital—your skills and earning capacity.

• Tax benefit: Deductible interest under Section 80E for up to 8 years.

• Popular courses in 2025: AI, ML, Data Science, Blockchain, and Digital Marketing have witnessed over 25% increase in enrolments across India.

Business Loan

• Why it's good: Drives revenue, expansion, and economic growth.

• Tax benefit: Interest is deductible as a business expense.

• SME Growth Fact: As per the Ministry of MSME, India's registered MSMEs grew by 18.5% YoY in FY24, proving strong ROI potential.

Debt Consolidation Using Secured Loans

• Why it's good: Reduces high-cost debt using low-cost secured loans.

• Example: A gold loan at 9–12% interest can replace a credit card balance costing 36–42% annually.

• Assets to leverage: Gold, real estate, fixed deposits, mutual funds, and even demat shares.

What Classifies as Bad Debt?

Here are common pitfalls to avoid:

Luxury Car Loans

• Funding a premium vehicle when a basic model would suffice adds no real value to your net worth.

Consumer Durable Loans for Lifestyle Purchases

• EMI-based purchases like a ₹2 lakh smart TV or a high-end smartphone can bloat your monthly outflows without any ROI.

Over-reliance on Credit Cards

• With annualized interest rates over 40%, rolling over balances by paying just the minimum due is a classic debt trap.

How to Manage Your Debt Portfolio Wisely

• Keep your debt-to-income (DTI) ratio below 35%.

• Use EMI calculators and loan comparison platforms to evaluate affordability.

• Monitor your credit score regularly via CIBIL, Experian, or CRIF platforms.

• Prioritise repayments on high-interest loans.

• Avoid impulse borrowing during sale seasons or festival splurges.

Final Thoughts: Don’t Fear Debt, Understand It

Debt isn’t your enemy; misuse is. Good debt can elevate your lifestyle, boost your net worth, and help you achieve your goals faster. Bad debt, however, can derail your finances. The secret lies in understanding the purpose and structure of the debt you take.