Good Debt vs Bad Debt
Debt that builds assets versus debt that funds consumption. Knowing which is which.
Not all debt is equal. The crucial distinction in personal finance is between good debt — borrowing that helps build wealth or income — and *bad debtDebt that builds wealth vs debt that funds consumption.* — borrowing that funds consumption and destroys it. Treating them the same is a costly mistake.
The dividing line is simple: does the debt buy something that grows your wealth or earning power, or something that just depreciates and disappears? Good debt funds an appreciating asset or higher income — a home loanA long-term secured loan to buy property. (builds an asset), an education loan (raises earning power), a sensible business loan — usually at lower interest ratesThe price of money — what borrowing costs and saving earns., because it’s backed by value. **Bad debtDebt that builds wealth vs debt that funds consumption.* funds consumption* — a credit-card balance for gadgets, a personal loanAn unsecured loan at a high interest rate. for a holiday, EMIs on a depreciating car beyond your means — usually at brutally high rates (credit cards can be ~40% a year), and it leaves you poorer with nothing lasting to show. The mental test before borrowing: *“WillArranging how your wealth passes on after death. this debt make me richer or poorer in the long run?”* Good debt is a tool that can accelerate wealth; bad debtDebt that builds wealth vs debt that funds consumption. is a trap that compounds against you. Minimise (ideally eliminate) bad debt ruthlessly; use good debt thoughtfully and within your means.
- Good debt — funds appreciating assets / higher income (home, education, sensible business), usually at lower rates.
- Bad debtDebt that builds wealth vs debt that funds consumption. — funds consumption (credit-card balances, holidays, over-budgetA plan for how you’ll spend and save your income. cars), usually at brutal rates.
- The test — “willArranging how your wealth passes on after death. this make me richer or poorer long-term?”; good debt can build wealth, bad debtDebt that builds wealth vs debt that funds consumption. compounds against you.
- The rule — eliminate bad debtDebt that builds wealth vs debt that funds consumption. ruthlessly; use good debt thoughtfully and within your means.
ExampleA ₹30 lakh home loanA long-term secured loan to buy property. at ~8.5% buys an asset and a place to live — good debt, used sensibly. A ₹1 lakh credit-card balance at ~40% for a phone and a holiday is bad debtDebt that builds wealth vs debt that funds consumption.: the interest alone could be ₹40,000 a year, and the “assets” are worthless or gone. Same word “debt,” opposite effect on your wealth.
Key takeawayGood debt funds appreciating assets or higher income (home, education) at lower rates and can build wealth; bad debtDebt that builds wealth vs debt that funds consumption. funds consumption (credit cards, holidays) at brutal rates and compounds against you. Ask “willArranging how your wealth passes on after death. this make me richer or poorer?” — eliminate bad debtDebt that builds wealth vs debt that funds consumption. ruthlessly, use good debt within your means.
FAQs
Is a home loan always “good debt”?
Generally yes — it funds an asset at a relatively low rate — *but only within your means*. An oversized home loan whose EMIs strangle your budget and savings becomes harmful regardless of the “good debt” label. The category is a guide, not a guarantee: even good debt must fit your cash flow and goals to actually help rather than hurt.