How To Distinguish Between A Good Debt & Bad Debt

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By Arpit Arora

Debt is an important part of life for a lot of people. Most people consider taking a loan as a bad thing and only take one if there are no other ways of getting financed.

They have this bad image of debt due to the compulsory payment of interest and borrowing that money which is not theirs.

They do not like making interest payments, but having a huge sum of money to buy a home or finance studies is not easy either so there arises a need to take a debt.

It is not just the need for finances because of which one should consider taking a loan, there are other factors as well which highlights the good characteristics of debt i.e. there is good debt as well.

The Good Debt

The Good debt is one which is both right, efficient, comes with hidden benefits and helps in making more money (productive purpose-oriented).

One example of a good debt is Home Loan which usually is supposed to be paid in EMIs of smaller amounts over a long period of time.

This loan comes with a benefit of section 80C and section 24 and Section 80EE of IT(Income Tax) Act.

Another characteristic of a Good Debt is that it should help in increasing one’s future potential like in the case of an Education loan.

This loan too has several benefits like income tax deduction under section 80E, credit score improvement, possibility to enhance income, etc.

A low rate of interest is also one big factor to be considered while deciding whether to take loans or not because any savings due to the low-interest rate is in a way our income.

This does not mean that we take debt for any purpose just because the interest rate is low. The purpose of the loan is very important it should be for a productive purpose.

The Bad Debt

Let’s talk about Bad Debt now and here, Bad Debt does not mean ‘A debt which can not be recovered’ like in accounting.

Bad debt here is referred to as a debt which harms the financial health of an individual.

For example, A loan taken to buy a luxury car will be called a bad debt as it is a high depreciation asset.

Similarly, a high-interest rate debt is also considered as bad debt as it creates a huge interest burden on the individual.

It has been seen that many people borrow to invest somewhere from where they expect a higher rate of return than the interest rate which may or may not be a wise thing to do as returns are not fixed but the interest is a compulsory payment.

We can now say that not all debts are a burden, few are good for our financial health.

It depends on the use of it. So the next time you consider taking a debt upon yourself, classify it under Good or Bad & then proceed wisely.


About Author

After spending over a decade in the financial industry in India and abroad, Arpit Arora realised that money is the biggest worry of most of the people, irrespective of their age. Through his startup AskTheWiseGuy.in, he now empowers individuals to get started on their journey towards creating passive income from their existing wealth.

(For more information on his webinars, please visit www.AskTheWiseGuy.in)

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