Good debt v/s bad debt = make v/s break

Being able to borrow too much allowed many of us to make bad decisions – decisions that led to painful consequences. While debt can help us build assets and achieve dreams, it is also true that debt can lead into a maze that is extremely difficult to unravel.

Rajiv Raj

Sudipto Dasgupta is confused. He borrowed money from the bank for a home loan and also some more money as a personal loan to buy a home theatre system to enjoy the music that he loves. His financial advisor tells him that while a home loan is “good debt”, acquiring a home theatre system worth Rs 1 lac is bad debt.

Certain types of debt can be used as financial tools to provide opportunities, such as a home loan or a student loan.  To make smart decisions about if, when and how much to borrow, you need to understand how to manage debt and make it work for you.

Living beyond your means often results in the unfortunate consequence of falling into a debt trap. When you already don't have funds to pay back an existing loan, but you take a new personal loan to pay off an existing loan, you are putting yourself at a huge financial risk and into the vicious cycle of a debt trap. This could become a never-ending cycle for you when you are forever in debt because your income is never enough to pay off all your loans. You will forever be working not to enjoy the fruits of your income, but rather to repay your liabilities to the lender. 

If building a good credit record is important to you, you need to know that the credit bureaus look and rate the different types of credit. They actually consider some credit accounts as being of less desirable and will lower your credit score if you rely heavily on them. Specifically, some instalment type accounts or loans, especially unsecured loans, may be viewed in a negative light.

Good debt v/s bad debt
Good debt is debt owed on an item that brings more value into your life than it takes in the form of money paid out. Good debt is temporary debt which ends with you having gained more than you invested. Debt taken on for what you think is a good reason isn’t necessarily equal to good debt.Debt taken on for what you think is a good reason isn’t necessarily equal to good debt. For instance if you take a personal loan to pay off a hospital bill, it might have been an essential debt but would not qualify as good debt.

Bad debt occurs when you borrow to invest but the value of the investment drops over time. This means that the asset is non-income producing and interest on the loan is not tax-deductible, for instance credit card debt or personal loans. If you find yourself with a lot of bad debt, budget your way out. Remember, debt and credit cards are tools that if managed properly can work to your advantage.

The author is Co-Founder & Director, CreditVidya

Disclaimer: Anycontent, views, opinions and/or responses on any of the pages of, expressed orsubmitted by the creators, contributors, sponsors or  advertisers, otherthan the content provided by IIFL, are solely the views, opinions andresponsibility of the person submitting them and do not necessarily reflect theopinions of IIFL.  IIFL does not warrant the accuracy, completeness orusefulness of the information. Nothing contained in or provided through thispage is intended to constitute advice or solicitation for anyinvestment/financial products or services, neither does it constitute an offerfor the purchase or sale of any financial instrument or confirmation of anytransaction. 


IIFL does nothold any responsibility for the consequences of any action or omission thereofbased on any information related to investment/financial products or servicesthat may be available on /through this page. Any reliance you place on suchinformation is strictly at your own risk. We may include links to other webpages, but these links are not an endorsement of those pages, products orservices. IIFL is not responsible for the content of any web site by otheroperators. Under no circumstances will IIFL be responsible or liable in any wayfor any content, including but not limited to, any errors or omissions in thecontent, or for any injury, death, loss or damage of any kind by any person asa result of any content communicated whether by IIFL or a third party. In noevent shall IIFL be liable for any special, indirect or consequential damagesor any damages whatsoever resulting from loss of use, data or profits arisingout of or in connection with the availability, use or performance of anyinformation communicated on this page. 


Please read ourother disclaimers and Privacy Policy.


Disclaimer | Disclaimer -Research  | Disclaimer -Discussion Boards | Disclaimer -Chat | Disclaimer -Twitter | Terms &Conditions  | Privacy Policy


Best Viewed in - 1024 x 768 and above resolution, IE7 & above, & other popular browsers
Copyright © 2011 Flame. All rights Reserved