Credit has never been this easy in India, with banks providing loans with door step service without much of a hassle and documentation.
As we cannot live a complete debt-free life, one should know when applying for a loan whether they are availing a good loan or a bad loan.
Not all loans are good or bad, it depends on the repaying capacity, whether the loan is for luxury or necessity, type of loan and reason to avail.
Now let us understand what is the difference between a good loan and a bad loan.
|Good Loan||Bad Loan|
|Education Loan||Credit Card Balance|
|Business Loan||Auto loan|
|Home Loan||Personal Loan|
Good debt or loan is a type of loan which creates assets over time and the product will not decrease with time such as education loan, home loan etc.
It is considered as good debt as the loan availed will serve the purpose of completing the education and become financially independent.
b) Home Loan
Home loan is a good debt under every circumstance. Not only does the asset value increase with time, one can avail tax benefits on the principal home loan amount as well as on the interest paid.
Availing loan for the second house is also a good debt as this investment is mainly to be given out on rent and can avail tax on the interest paid under deductions.
However, if you own two houses, one would be deemed to have given on rent, whether you rent it or not. So, income from rental will accrue on one of the houses for sure.
Business loans help individuals borrow money to expand their business, hire extra people, for a new product etc, which in turn help to grow business.
Bad loans or bad debts are those which is availed to serve only for a luxury purpose such as buying luxury items from credit cards, availing loan for a foreign trip, auto loan.
a) Credit cards
Credit card debt is usually considered as bad debt as the interest charged on them are very high. Bad credit debt can destroy your financial health. Instead, one can save regularly and buy at one go.
There are individuals who avail loan to make payment for their credit card bill.
Interest rates on personal loan are supposed to be high. One can consider only when it is absolutely necessary. Availing loan for an international trip can serve as bad debt as for a vacation of one week, they can end up paying EMI for 2-3 years which does not sound like a good idea.
c) Auto loans
Auto loans can be good or bad falling and is generally considered a grey are. Good or bad depends on the purpose of buying the vehicle and repayment capacity.