Good Debt vs Bad Debt: What Every Indian Professional Should Know

India's relationship with debt is shifting rapidly. As of June 2024, household debt has reached 42.9% of the country’s GDP, a steep rise from 36.6% just three years ago (source).

What’s more - over 91% of this debt is borrowed by individuals, not businesses. From EMIs on gadgets to home loans and BNPL schemes, borrowing has become a default financial behaviour. (source)

But here’s the problem: not all debt is equal. Some loans can help build wealth, while others quietly chip away at your savings, peace of mind, and future plans. With RBI tightening norms on unsecured credit and delinquencies rising, it’s never been more important to understand the clear line between good debt and bad debt - and how to use this knowledge to make smarter financial decisions.

What is Good Debt?

Good debt is any loan or credit that helps you grow financially over time. It either creates an asset (something that increases in value) or improves your earning potential (like higher education or business expansion). Unlike bad debt, good debt is typically planned, has a clear repayment path, and often comes with lower interest rates and tax benefits.

Use the Double A Framework

To evaluate if a loan is good debt, apply this two-step filter created by Indian finance expert Harsh Roongta:

1. Asset or Income

Will the loan create something valuable - like a house, a degree, or a business?

2. Appropriateness

Even if the loan has a valid purpose, it must also fit your financial situation. As Harsh Roongta advises, all your loan repayments combined should typically not exceed one-third of your income. This helps ensure you’re not compromising your savings or financial stability.

- Source: Harsh Roongta, Economic Times

If both answers are "yes", it’s likely a good debt.

Examples of Good Debt

Let’s break down some of the most common types of loans that qualify as good debt - as long as they satisfy both conditions of the Double A framework: they create value and are affordable to repay.

1. Home Loan

• A home loan is a classic example of good debt - it helps build a tangible asset that typically appreciates over time.
• It offers tax benefits under Section 80C (principal) and Section 24(b) (interest).
• If your EMI is within 30–35% of your monthly take-home income, and the property aligns with your long-term living or investment needs, it passes the Double A test.

2. Education Loan

• A loan taken for higher education - especially in fields like medicine, law, or MBA - can significantly improve earning potential.
• Interest paid qualifies for deduction under Section 80E.
• It’s important to ensure the course and institution offer a strong ROI. A ₹15 lakh loan for an IIM or IIT is very different from a similar loan for an unrecognised private college.

3. Business Loan

• If you’re self-employed or running a practice, a business loan used to upgrade equipment, expand services, or hire talent qualifies as good debt.
• It should directly or indirectly boost your revenue.
• However, loans taken without a revenue plan or purely to “stay afloat” without reform can easily tip into bad debt.

4. Loan Against Property (LAP)

• This loan is secured against a property you own, and the interest rate is typically lower than personal loans or credit cards.
• It’s a smart move if the borrowed funds are used for business, real estate investment, or education - not lifestyle expenses.
• Since it involves risking your existing asset, it must be used only for productive outcomes.

What is Bad Debt?

Bad debt is any borrowing that does not create an asset or improve your income - and often ends up hurting your financial health. These loans:

• Are typically used for short-term consumption
• Come with high interest rates
• Offer no tax benefits
• Often push people into EMI traps and investment delays

Even small amounts of bad debt, if unmanaged, can compound over time and derail your savings, insurance, and long-term goals.

Early Warning Signs of a Bad Debt

• Fails the Asset or Income Test:
  If the loan doesn’t lead to future growth or wealth creation, it’s suspect.
• Emotionally or Socially Driven:
  Loans taken to maintain social status or fund impulsive desires (like designer items or destination weddings).
• No Clear Repayment Plan:
  Borrowing without a schedule to repay leads to stress and long-term liability.
• High EMI Pressure:
  If you’re skipping SIPs or insurance to pay off EMIs, the loan is likely hurting more than helping.
• Multiple Debts, No Closure Plan:
  Juggling 3+ loans without an avalanche or snowball method is a trap.

Examples of Bad Debt

Not all loans are helpful. These common forms of debt are often financial traps - especially when taken without a clear need, plan, or repayment ability.

1. Credit Card Outstanding

• Credit card interest rates in India can reach 36–48% annually.
• Rolling over your balance or paying only the minimum due leads to compounding debt.
• SBI reported credit card defaults rising to ~2% by early 2024 (source).

2. Personal Loan for Lifestyle

• Often taken for weddings, holidays, gadgets, or impulsive big spends.
• RBI data shows 24% YoY growth in personal loans in 2024, much of it unsecured (source).
• High EMIs reduce savings and delay investing.

3. Buy Now, Pay Later (BNPL)

• BNPL schemes look attractive upfront but come with hidden fees and hefty penalties on missed payments.
• Young earners tend to over-borrow across apps, making tracking difficult.
• Small loans across platforms add up fast and are easy to lose control over.

4. EMIs for Gadgets & Furniture

• EMIs for depreciating assets like smartphones, TVs, or lifestyle appliances are not wealth creators.
• They usually fail both the “asset” and “affordability” filters.
• If your purchases don’t generate value or income, avoid EMI-based buying unless absolutely necessary.

Good Debt vs Bad Debt: A Quick Comparison

Now that you’ve seen both sides, here’s a side-by-side view to help you distinguish between good and bad debt before you borrow:

How to Manage Debt Smartly in India

DTI Formula

Debt-to-Income Ratio (DTI) = (Total EMIs ÷ Net Monthly Income) × 100

This helps you assess whether your monthly debt is manageable. A DTI under 35% is generally considered safe.

2. Prioritize High-Interest Debt

Pay off credit cards and BNPL first using the avalanche method to reduce your total interest burden faster.

3. Refinance Smartly

Explore lower-cost secured options like gold loans or loan against property (LAP) instead of high-interest personal loans.

4. Avoid Lifestyle Creep

Avoid stacking EMIs for non-essential purchases. Just because you can afford the EMI doesn’t mean the loan is necessary.

Signs You’re Trapped in Bad Debt

Minimum Dues

Only paying the minimum on your credit card? You're stuck in compounding interest. This delays full repayment and leads to ballooning balances that hurt your credit health.

Borrowing to Repay

Using one loan to pay another is a sign of a debt spiral. It only postpones the problem and increases your total interest burden over time.

Skipping Investments

If EMIs cancel your SIPs or insurance premiums, it's a red flag. It compromises your future goals and emergency preparedness just to manage current debt.

No Closure Strategy

Managing multiple loans with no repayment hierarchy causes confusion and overwhelm. Without a structured payoff method, your finances stay cluttered and progress stalls.

Is All Debt Bad?

Absolutely not.

Debt, by itself, isn’t the enemy. In fact, strategically used debt can be a powerful tool to accelerate your growth - whether it’s building a home, funding a business, or investing in education.

The key lies in intent, structure, and repayment discipline.

Final Takeaways

• Debt isn’t bad - misuse is.
• Use the Double A filter: Does it build value? Can you afford it?
• Stay under 35% DTI, and avoid loans that delay savings or cause stress.
• Make debt work for your goals - not against them.

Frequently Asked Questions (FAQs)

1. Is taking a loan always a bad sign?

No. Loans used wisely to build assets or improve income can be beneficial. Strategic debt can support your financial growth if managed well.

2. What is a safe DTI ratio for Indian professionals?

Keep it below 35%. Anything higher means you're over-leveraged and may struggle to meet long-term financial goals.

3. Are car loans good debt?

If used for business or daily commute and the EMI is affordable, yes. Otherwise, it depreciates fast and rarely adds financial value.

4. How can I get out of bad debt?

List all debts, pay off high-interest ones first, avoid new loans, and increase EMI payments when possible. Consider balance transfers if needed.

5. Are credit card EMIs bad?

Only if used frequently or for long tenures. They're best avoided unless 0% interest offers apply and you can repay within the tenure.

6. What should I do before taking a loan?

Check the Double A test: Will it add value? Is it affordable? If both answers are yes, plan your EMIs and repayment clearly.

Disclaimer:This article is for educational purposes only and should not be treated as financial advice. Please consult a qualified financial advisor before making any loan or debt-related decisions.