Money Basics · Money 101

Good debt vs bad debt

Not all debt is evil. The mistake is treating all borrowing the same.

Good debt: borrows to create more value

• Home loan: your property may appreciate over time, and the EMI builds an asset you keep. Interest up to ₹2L is deductible under Section 24, but only on the OLD regime, and only for the home you live in. On the new regime (the default) that deduction is zero, so don't price it into your EMI maths.
• Education loan: increases your earning capacity. A ₹10L loan for an IIM degree that adds ₹20L/year to your income is a good trade.
• Business loan: capital that generates returns above the interest rate.

> Good debt is an investment in a future version of yourself that earns or owns more.

Bad debt: borrows to consume

• Credit card revolving debt: 36–42% annual interest. The most expensive money in India.
• Buy-now-pay-later for gadgets: you pay more for something that depreciates to zero.
• Personal loan for a vacation: you're paying interest on experiences that are already over.
• Gold loans for non-investment use: pledging an asset for current consumption.

The interest rate test

Ask: will this debt help me earn or build something that returns more than the interest rate?

• Home loan at ~8%: potentially yes, if the property appreciates. Don't price in the Section 24 deduction unless you are on the old regime.
• Credit card at 40%: almost never. No investment reliably returns 40%.

40%Annual interest on unpaid credit card balance

~8%Home loan rate. Repo-linked, so it moves when RBI moves

The real test

Before any loan, two questions in order. Could you live without the thing? If yes, the loan is buying convenience, and you're paying interest for it. If no, the question becomes which form of that debt is cheapest. The worst combination is the common one: high-interest debt funding something discretionary, where you pay the steepest rate for the purchase you needed least.

Takeaway. Good debt builds assets or earning power. Bad debt funds consumption at interest rates that are impossible to beat. Know the difference before signing.