Good Debt vs Bad Debt
What is it?
Good debt is borrowing used to acquire something that grows in value or increases your earning potential (e.g. an education loan, sometimes a home loan). Bad debt is borrowing used for depreciating purchases or consumption (e.g. high-interest credit card debt for lifestyle spending).
Why should you care?
Not all debt is equally harmful — the key differences are the interest rate, and whether the borrowed money is funding something that grows in value or something that loses value the moment you buy it.
Real-life example
An education loan at 9% p.a. that funds a degree leading to a higher salary can pay for itself many times over — a form of "good debt." A credit card balance carried at 36-42% p.a. to fund discretionary spending compounds quickly and rarely funds anything that grows in value — a clear case of "bad debt."
Common mistakes
- Treating all debt the same regardless of interest rate — the gap between a ~9% home loan and a ~40% credit card is enormous over time.
- Taking on debt for depreciating assets (gadgets, vacations) without a clear repayment plan, letting interest compound on something with no lasting value.
- Ignoring debt entirely in financial planning, assuming only savings/investments matter — high-interest debt should typically be paid down before aggressive investing.
Typical interest rate ranges in India (illustrative, varies by lender/profile)
| Debt type | Typical rate range | Usually |
|---|---|---|
| Home loan | ~8-10% p.a. | Can be good debt |
| Education loan | ~9-11% p.a. | Can be good debt |
| Personal loan | ~11-20% p.a. | Depends on use |
| Credit card revolving balance | ~36-42% p.a. | Usually bad debt |
FAQ
Should I ever take on debt?
Debt can be a reasonable tool when the interest rate is low relative to the value it creates (education, a home) and you have a clear repayment plan — the goal is not zero debt, but avoiding high-cost debt for low-value purposes.
Is a home loan always good debt?
Generally favourable given relatively low interest rates and the asset's potential to hold or grow in value, but it still needs to fit your repayment capacity — a home loan you can't comfortably service isn't "good" just because the category usually is.
What should I prioritise — paying off debt or investing?
A common approach is to pay off high-interest debt (like credit cards) aggressively first, since its cost usually exceeds realistic investment returns, while continuing to invest through lower-interest debt like a home loan.
Does taking a loan against mutual funds count as good or bad debt?
It depends on the purpose — using it for a genuine need at a reasonable interest rate can be reasonable, but using it to fund discretionary spending adds cost without building anything.
See this concept applied to your own portfolio
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