Last Updated on April 23, 2026 by teamtfl
“A man in debt is so far a slave.” – Ralph Waldo Emerson
A few years ago, I had a client walk into my office who owned a 3BHK flat, drove a good car, and sent his children to a private school. On paper, he looked prosperous. But when we sat down to review his finances, something was wrong. His monthly income was Rs 1.8 lakh. His total EMI outflow was Rs 1.1 lakh. He was living on Rs 70,000 per month – and his savings rate was zero.
He had a loan problem. And he did not even know it, because each individual loan had seemed reasonable when he took it.
⚡ Quick Answer
Not all loans are equal. Good debt (home loan, education loan, business loan) creates productive assets or income-generating capacity. Bad debt (credit card revolving balance, personal loan for consumption, EMI for electronics) drains wealth without creating any. The test: does this loan help you build something valuable, or does it fund current consumption? As a rule, total EMIs should not exceed 35-40% of take-home income. Credit card outstanding should be zero every month – at 36%+ annual interest, it is the most destructive debt available.
Why Lenders Want You to Borrow
Banks and NBFCs are in the business of lending. The more you borrow, the more they earn. A home loan at 8.5% over 20 years means you pay back roughly 2.3 times the original principal. A credit card balance at 36-42% annual interest can double in under 2 years.
This is not a criticism of banks – they are doing exactly what their business requires. But it means the incentive structure is entirely misaligned with your financial health. The lending industry’s profit depends on your willingness to borrow, stay in debt, and pay interest. Your financial health depends on the opposite: borrowing minimally, purposefully, and paying down quickly.
The modern Indian consumer is surrounded by debt encouragement: zero-cost EMI (which is never truly zero-cost), buy-now-pay-later schemes, pre-approved personal loan offers in your banking app, and credit card reward points that make spending feel like earning. None of these change the underlying math.
Good Debt vs. Bad Debt
The distinction is about what the debt creates. Good debt finances assets that appreciate or generate income. Bad debt finances consumption that depreciates immediately.
A home loan is good debt – provided the property is at a reasonable price, the EMI is within your capacity, and you are not stretching to buy beyond your means. You are building a tangible asset. The loan also provides tax benefits under Sections 80C and 24 of the Income Tax Act – the principal repayment qualifies under 80C deduction and the interest under Section 24, within the limits applicable to your situation.
An education loan is generally good debt – it finances an investment in income-earning capacity. The key condition: the expected salary after the education justifies the loan amount. An Rs 80 lakh loan for an MBA that produces an Rs 8 lakh starting salary is questionable math.
A personal loan to buy a TV, or to fund a wedding beyond your means, or to pay for a vacation – these are bad debt. The asset you buy depreciates immediately or provides no financial return. You are paying 12-18% annual interest for consumption.
The EMI trap: each loan seems affordable individually. Together, they can consume your entire savings capacity.
RetireWise reviews your debt structure as part of the financial planning process – identifying which loans to accelerate, which to refinance, and how to free up cash flow for wealth creation.
The Credit Card Trap
Credit cards at 0% interest – for the billing cycle – are excellent tools. You get 30-45 days of float, reward points, travel miles, and fraud protection. Used correctly, a credit card costs nothing and benefits you.
Credit cards carrying a revolving balance at 36-42% annual interest are a financial emergency. This is the highest-cost consumer debt available in India. An Rs 1 lakh balance at 36% annual interest will double to Rs 2 lakh in approximately 26 months if only minimum payments are made.
The rule is simple: never spend on a credit card what you cannot pay off in full before the due date. The moment you start carrying a balance, the card transforms from a financial tool into a debt trap. Pay the full outstanding every month without exception.
How to Prioritise Debt Repayment
If you are servicing multiple loans simultaneously, the sequence of repayment matters. The financially correct approach is to eliminate high-cost debt first, regardless of the outstanding amount.
Credit card dues first – at 36-42% annual interest, every rupee of outstanding is costing you more than any investment can earn. Personal loans next at 12-18%. Car loans at 8-10%. Home loan last – it has the lowest rate, the longest tenure gives you flexibility, and in many cases the tax deduction under Section 24 reduces the effective cost further.
Any surplus cash flow – a bonus, an increment, a windfall – should go toward the highest-cost debt before any additional investment. A 36% debt extinguished delivers a guaranteed 36% return, which no equity fund can promise.
The CIBIL Score and Why It Matters
Your credit history is now centralised through credit bureaus including CIBIL, Experian, and Equifax. Every loan you take, every credit card payment you make (or miss), every default you have ever had is visible to any lender who checks your credit score.
A CIBIL score above 750 means you get the best loan rates. Below 650, many lenders will either decline or charge significantly higher rates. Credit card defaults from earlier years can show up a decade later when you apply for a home loan.
Maintaining a good credit score is not complicated: pay all EMIs on or before due date, never miss a credit card payment, keep your credit utilisation below 30% of your card limit, and avoid applying for multiple loans simultaneously.
Read: Why You Should Not Buy Home Loan Protection Insurance Plans
Debt is not inherently bad. Used purposefully – to create assets or fund income capacity – it is a financial tool. Used casually – for consumption and comfort – it is a drain that prevents wealth creation. The difference between a financially free person and a financially stressed one is often not income. It is how they handle debt.
The borrower becomes the lender’s slave. Borrow purposefully or not at all.
What percentage of your income is going to EMIs right now?
RetireWise maps your complete debt picture as part of every financial plan – loan by loan – and builds a paydown strategy that frees up cash flow for retirement savings.
Your Turn
What is your total EMI outflow as a percentage of your take-home income right now? And how does it feel – manageable, tight, or suffocating? Share in the comments.
I want to buy a car, I have 625000 in bank fixed deposite with 8.5% interest.
The amount required to buy a car is 625000, should I BUY THE CAR BY WITHDRAWING THE FD OR TAKE A LOAN WITH 10.5% INTEREST ON MONTHELY REDUCING BALANCE FOR 5 YEARS, WHICH WILL BE CHEAPER?
My application was rejected. Credit Sudhaar was my choice. Initially they were slow. But their counsellors were able to handle all my queries. I will give Credit Sudhaar a positive review.
If one can afford down payment for buying a house, should one go for a home loan or not? Any specific advantages of home loan? (apart from some tax saving)?
dear Mr. Beniwal,
I have two loans:
i. Home loan @ 10.4% (Started in 2012)
ii. Refundable PF loan @ 9.65% (Started in 2012)
Which of the above I should close at the earliest.
best regards,
mohan
God bless you sir, You are doing service to humanity which is service to God. Keep it up. thanks and best regards.
Thanks Vikas, is there any extra charge for making a part prepayment ? Maximum how much amount can make prepayment in my case as said in above?
Hi Hemanth,
Nice article again on loans, Actually I am planning to take a home loan of Rs 15L to construct a new building in my open plot. Before that I have 2 PLs(1Lac with 16.50% ROI & 1L with 14.25% ROI). After 6 months from now I am planning to close this 16.50% ROI PL as it is very high compared with other one. I heard that banks will charge 4% on principle outstanding of my PL along with principle outstanding amount. Is this correct close like this instead of paying high EMI for 3 years or do I need to continue as is with EMI for next 3 years?
Pls suggest the best way of closing the personal loan as it will affect my home loan limit as well.
Regards,
Kamati Srisailam
Kamati,
Yes, in foreclosing a PL, banks charge some penalty. You can only avoid it by making a part prepayment and not closing the loan fully.
I am always looking for ways to get money without taking a loan. However, sometimes you simply can’t avoid it. It’s very important to know how to choose one.
By the way, I was wondering if you accept guest posts on your blog.
I am kindly waiting for your answer.
Paul
Yes it is important to choose the loan. Guest posts do appear on TFL.
I had bitter experience. Thought of sharing to our readers.
I took floating rate car loan (at 10.25%) assuming the rate will come down (as RBI started reducing their ratios) by parking my money in FD’s.
Banks didn’t reduce the interest rate for my loan. My money is locked in
The bitter part is that
1) I paid additional charges to bank like processing fee
1a) additionaly stamp charges
2) While closing the loan, i paid Rs.200 for getting closing charges
3) RTO charges to remove hypothecation
4) Additional effort by me to run between banks and RTOs
Thats one of my bad financial decision. Lost in the gamble 😀
This experience could be part of your blog
I want to invest on some mutual funds. I need advice from you. Please give me appointment so that I can meet you in your office.
Thanks
Thanks again for this knowledgable article.
Please revert for the newcomours, are going to take Homeloan in a specified monthly income in the current scenario.
Regards
Hi Niraj,
I am not able to understand your question – please clarify.
We all are happy to take Income Tax exemption on Home Loans. In fact, I have seen people, who can afford to pay for a house outright, taking home loan to avail IT exemptions. Can you please explain, do we really gain in this way or its just a myth?
Hi Biswajit,
If you are able to find an investment avenue which can deliver more than Home loan rate minus tax benefits.
Hi Hemant,
Very good article. One more question – taking a personal loan from a bank at a slightly lesser rate than the term deposit rate and creating an FD out of the loan amount – repaying the loan through monthly EMIs. Is it worth doing? Of course, there will be a service tax component which gets added up to the EMIs. Pl. suggest.
hi rajanna,
1)first,you will never get loan at lesser rate than FD.
2)second , if this happens (I don’t kow how ) do good mathematics, and yu will find yourself in loss.
Rakesh
Hi Hemant,
Yes very nice article. Loans are really a pain for a human being and as you rightly pointed out that it takes away our financial freedom. According to me we should take things like LCD’s, washing machines or refrigerators on EMI’s as we get those things on zero percent interest rate for which we only have to pay Rs. 500 to 600 for processing fees which is quite affordable.
Hi Manoj,
If we are paying Rs 500 processing fees on Rs 10000 loan – it is 5% & if we are talking about payments in 6 months – it is 10% interest rate. 2 more things:
1. You loose benefit of cash discounts or bargaining.
2. You may purchase unnecessary goods which actually you don’t need or you can’t afford.
Dear Hemant
You are absolutel right when you distinguish between productive loans and unproductive loans.
As long as value is getting created out of the loan taken and that could be business growth, asset creation, value creation etc and where the value accretion is far higher than the interest outgo and of course your peace of mind then it is definitely wise to go for loans.
I have seen certain people completely desisting from the word credit. One needs to understand as long as your interest outgo is lesser than the income earned one must be prudent to cease the opportunity.
I also advise people against spending on borrowed money. Now that’s an unproductive loan that will only cause heartburn in future. After all our ancestors were no fools in advocating “Jitne Chaddar untna Felav” when it comes to spending.
Hi Narendara,
Rightly said – see car loan for consumers is bad idea but same loan for a taxi owner is a business decision.
Hi Hemant,
This article is quite useful. Specially the part ‘Good debt is used to create productive and long-term assets or to increase one’s income-generating capabilities. So a home loan, loan to buy land, education loan and loan to set up a business would fall under the ‘good debt’ category.’
This answers my query posted on your last article about real estate investments. This is what exactly I meant when I asked whether I should buy a property (with 60% loan) to generate a second source of income. For a few years rental income will pay-off the installments, later the property will generate rental income as second source of income.
Thanks Hemant for this article. 🙂
Regards,
Nishi
Hi Nishi,
Buying Home/Flat is a big decision – do all permutation combination before taking plunge.
I am having home loan, so it looks to be good debt, but still try to prepay to get rid of it.
I am using credit card for last 5 years, never ever paid any extra money to bank in form of interest or other charges. Its important to use credit card in smart manner after all you are getting 52 days free credit/
Hi Neeraj,
Credit card is having lot of side effects biggest is it spoils our spending habits & impacts saving capacity.
True.People often have a habit of paying just the “minimum due” on their credit card even if they can afford to pay in full – without even realising how much they are actually paying for this revolving credit. Same goes for other loans like Housing and educational loans. Have come across people who have huge loan outstandings but still invest the surplus money in investment products.
Hi Annapurna,
If someone is paying “minimum due” he is best customer for credit card company – getting 30-40% return/interest is an awesome business 😉
Hi,
Sanjay I will ask you to pay after taking a personal loan because it will save your 6% interest and after taking loan you should start paying the interest amount from your monthly income.
In future you should keep emergency funds in your Bank Account between 4-6 months so that if loss in job that would not result you to pay your personal loan payments.
i have few small debts from 5 different people totaling about 5 lakhs and each one is having interest rate of 20% pa. should i take a personal loan at 14% and settele it at once or should i myself pay it monthly. which one is better.first one is having a peace of mind quotient
I have house on my name but it is on house loan. Can any bank grant me the loan for it?? Its been three years I am paying my EMI regularly.
Hi Subhash,
You havn’t specified for what you want to take the loan from the bank. If it’s a Loan Against Property (LAP) then it can be taken only against free-hold property. Which means your house should be free from any encumbrance (i.e. it is not given as security for any purpose).So if you have a home loan running, you will not be eligible for LAP till you repay your home loan. Kindly specify what is the objective of taking a loan from the bank.