Good Debt vs Bad Debt in India Explained
How to tell if your loan is building your wealth… or sinking it
What is Good Debt?
Good debt is borrowing that creates future value—either by building an appreciating asset (like property) or boosting your earning potential (like further education or a business). Good debt is typically low to moderate interest, planned, and fits your budget well.
- Creates an asset (e.g., home, productive equipment)
- Increases income, skills, or net worth
- Comes with manageable EMIs (within 30–35% of income)
- Often offers tax benefits (under sections 80C/24b/80E)
What is Bad Debt?
Bad debt funds short-term wants, depreciating assets, or lifestyle spends that don’t increase your wealth. It typically comes with high interest (18–48%), little to no tax benefit, and hurts your future financial goals .
- Funds lifestyle expenses, not assets (fashion, gadgets, holidays)
- High interest rates (credit cards, BNPL, payday loans)
- No tax benefits; often crowd out savings
- Often become hard to repay and lead to debt traps
Good Debt vs Bad Debt: Comparison Table
| Criteria | Good Debt | Bad Debt |
|---|---|---|
| Purpose | Builds assets or future income | Funds short-term consumption/lifestyle |
| Examples | Home loan, education loan, business loan, income-generating vehicle | Credit card for shopping, payday loan, BNPL for phone/upgrades |
| Interest Rate | Low–moderate (8–12%) | High (18–48%) |
| Tax Benefits | Yes (80C, 24b, 80E) | None |
| Wealth Impact | Positive: increases net worth | Negative: reduces savings, may hurt credit |
| Debt-to-Income Suggestion | EMIs < 35% of income | Often > 40%, risky |
Double-A Rule for Good Debt:
1. Does the loan create value (asset/income)?
2. Is it affordable (EMIs within 35% of income)?
If both YES, it's likely good debt. Else, beware!
1. Does the loan create value (asset/income)?
2. Is it affordable (EMIs within 35% of income)?
If both YES, it's likely good debt. Else, beware!
Examples of Good Debt in India
Example: Riya's Smart Borrowing
- Problem: Spending ₹150/day on commute by cabs/rickshaw
- Solution: Took two-wheeler loan, pays EMI of ₹2,400/month, uses ₹600 petrol/month
- Net saving: Commute now costs ~₹3,000/month instead of ₹4,500+, vehicle is owned after 3 years
- Value: Saves money, increases efficiency at work (arrives on time, less stress)
- Conclusion: Good debt—creates asset, saves money, fits within budget
Examples of Bad Debt in India
Example: Arjun's Bad Debt Trap
- Used credit cards and BNPL for new phone (₹20,000), TV (₹30,000), holiday (₹30,000)
- After 2 years, owed ₹75,000, paying minimum due only. Paid over ₹28,000 just in interest
- No extra income, regrets not saving or investing
- Credit score fell due to missed payments and heavy utilization
- Conclusion: Bad debt—no wealth created, only stress and loss
Key Tips for Indian Borrowers
- Favor debt for assets or career advancement (house, degree, business)
- Pay off credit cards and consumption loans as fast as possible
- Keep your overall EMIs within 30–35% of net income
- Ask—does it build your net worth or raise your income?
Conclusion: Be Debt-Wise, Not Debt-Free
- Not all debt is bad—some is a stepping stone to a brighter future (house, knowledge, business)
- But taking loans for instant pleasure or lifestyle? That will set you back years
- Apply the Double-A (Asset & Affordability) test before every loan
- Use debt to create wealth, not stress!
Takeaway: Let good debt build your dreams, and avoid bad debt that destroys your peace of mind and prosperity