Debt: Bad or Worse?

For the past 3 decades (at least) YOU have been told by us (media) that there is ‘good’ debt and that there is ‘bad’ debt.

Good debt is a beautiful concept ‘created’ by lenders with a great, benevolent image to say that:

interest rates are low

it is tax deductible and

it is used to fund an asset that will always appreciate.

Bad debt on the other hand is:

you take it because you want to live beyond your ability to pay cash (the world accepts that cars can only be bought on installments),

interest rates are high, but that is ok. Banks have to earn, do they not?

it is not tax deductible, but it allows you to enjoy life NOW and pay for it later

Typical examples in the first section is of course a HOUSING loan – sold to you saying that if you borrow at 10% p.a. and buy a house, the house will ALWAYS appreciate at 14% p.a. so your Wealth will always go up. Awesome story.

Then there is the education loan. Take a loan of Rs. 10,00,000 do an MBA and get a Rs. 12,00,000 job. Awesome return on investment.

The next category is of course car loan, wedding loan, cricket match abroad loan, divorce loan, – largely any reason as long as the banker is sure he will get back his loan amount. It is a Form 16 loan, based on your ability to repay ….

The truth is there are only 2 types of loans:

Bad loans and Worse loans.

All loans are bad. If they have tax deduction, that acts as a ‘malam’ that is all.

Period.

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20 Responses to “Debt: Bad or Worse?”

  1. Debt is termed as good and bad as there is some reason behind it. Good debt is something which gives you something in return such as home loan, education loan, vehicle loan etc., Bad debt is where you borrow money but do not gain anything in terms of money value e.g., personal loan, holiday loan, credit card loan etc.,

    Also, debt is definitely good as it proves your ability to pay off the borrowed money taken from the market. But you need to draw a line where you feel burden while repaying it. To know more on debt visit the above link by clicking on my name.

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