Loans: the golden rules — and when debt is actually good
Debt is a knife. It cuts vegetables and it cuts fingers — the knife doesn't decide which. In a country where an EMI now exists for everything from a flat to a phone cover, the skill isn't avoiding loans; it's knowing which ones build you and which ones bleed you. Start with the picture that explains most of it — what different borrowing actually costs:
Approximate prevailing ranges — actual rates vary by lender, credit score and time.
Good debt, bad debt: the one-question test
Does the thing you're borrowing for grow, earn, or vanish? A home loan buys an asset (and a roof). An education loan buys earning power — often the highest-return debt that exists: ₹15 lakh borrowed that triples a career's income is maths no investment matches. A sensible business loan buys an income engine. That's good debt: it typically sits at the cheap end of the chart and builds something. Bad debt is the mirror image — borrowing for things that vanish: the wedding, the vacation, the phone upgrade on EMI. The expense is gone in a week; the EMI stays for years. And at the far red end sits credit-card revolving — at ~40%, paying only "minimum due" means the balance barely falls while interest compounds monthly. If any debt deserves the word emergency, it's this one: clear it before every other money move, because no investment on earth reliably beats 40%.
The golden rules
1. All EMIs together ≤ 35–40% of take-home pay. Cross it and one bad month cascades — this is the single number lenders, planners and our own audit engine all watch. 2. EMI assets, never EMI lifestyle. If it vanishes or depreciates fast, save for it instead — the discipline of waiting is also the test of whether you wanted it. 3. Credit cards: full payment, every month, no exceptions. Used this way the card is free credit and a CIBIL builder; revolved, it's the most expensive money in India. 4. A small personal loan is usually a missing emergency fund wearing a disguise. Fix the buffer (3–6 months of expenses) and most "urgent" loans never need to happen. 5. Prepay expensive, invest past cheap. Debt above ~11–12% (personal, cards) — clear it before investing a rupee; it's a guaranteed return no market offers. A home loan at ~8.5%, with tax benefits, can reasonably co-exist with long-term SIPs — that trade-off is a genuine advisor conversation. 6. Watch total interest, not EMI. The EMI is what fits your month; the interest is what you actually paid:
7. Know your rate's surname. A "flat rate" of 10% on a vehicle or consumer loan is roughly an 18–19% reducing-balance rate wearing makeup — always ask for the reducing rate and the total repayment figure before signing. And through all seven rules, one habit protects the future: pay everything on time. Your CIBIL score is the memory of your behaviour, and it prices every loan you'll ever take next.
So — is debt good or bad?
Wrong question. Cheap debt that builds assets, inside the 40% line, paid on time — good. Expensive debt for vanishing things, or any revolving balance — bad, always. The chart at the top is really a map of those two worlds, and the colour tells you which one an EMI lives in.
General financial education, not advice. All rates and figures approximate and illustrative; actual terms vary by lender and borrower. Decisions about prepayment vs investment depend on your full situation — best made with a qualified advisor.
Related reading: The right money mix for your age · The plain-words money glossary