Most Indians have shunned debt as a taboo for years. The outlook, however, is rapidly changing. Today, the whole process of thinking about debt is much more organised and falls into the categories of good debt and bad debt.
Let’s explore the difference between good and bad liabilities, using real-life examples to make things clear.
Harsh Roongta suggests distinguishing good loans from bad ones using the “double A principle,” where a loan should be both an asset and appropriate.
What Are Good Liabilities?
Good liabilities are debts you take on for things that can help you earn more money or improve your financial future. These debts generally have lower interest rates and can increase your wealth over time.
Let’s look at a few examples:
- Education Loans: Borrowing ₹5 lakh for a professional course in Bangalore, leading to a ₹12 lakh annual job, demonstrates how education loans can boost career growth and income.
- Home Loans: A ₹40 lakh home loan to buy property in Bangalore could increase in value to ₹60 lakh, boosting your wealth and asset-building over time.
- Business Loans: Borrowing ₹2 lakh to start a business, resulting in ₹10 lakh annual earnings, makes the loan a good liability by building wealth and providing steady income.
What Are Bad Liabilities?
Bad liabilities are debts that don’t help you make money or improve your financial situation. They often have high interest rates and can cause stress if not managed well.
Let’s look at some examples:
- Credit Card Debt: Using a credit card for unnecessary purchases and paying only the minimum can lead to growing debt, making it a bad liability.
- Personal Loans for Non-Essential Purchases: Taking a ₹ 1 lakh personal loan for a vacation in Bangalore is fun short-term, but it doesn’t add to your financial future, leaving you with debt that affects savings, making it a bad liability.
- Payday Loans: Payday loans have high interest rates. Borrowing ₹ 10,000 for bills can lead to ₹ 12,000 or more in repayment, making them dangerous and bad liabilities.
Managing Good and Bad Liabilities
Managing both good and bad liabilities is key to having healthy finances. Here’s how you can manage them:
- Set Financial Goals: Before borrowing, consider your goals. Loans for education can boost future income, while loans for vacations may not offer long-term financial benefits.
- Focus on Good Liabilities: Borrow for things that add value, such as education, a home, or a business.
- Avoid Bad Liabilities: Avoid credit card debt and loans for unnecessary items like shopping or luxury goods.
- Make a Budget: Create a budget to manage good and bad liabilities, allocating money for loan payments, savings, and investments.
- Build an Emergency Fund: An emergency fund helps you avoid high-interest loans, protecting you from bad liabilities during unexpected situations.
Statistics and Example:
Here’s a simple table to show the difference between good and bad liabilities:
| Liability Type | Example | Loan Amount | Potential Outcome |
| Good Liability | Education Loan | ₹5 lakh | Higher-earning job, increased income |
| Good Liability | Home Loan | ₹40 lakh | House appreciates in value. |
| Bad Liability | Credit Card Debt | ₹50,000 | High interest, growing debt |
| Bad Liability | Personal Loan for Vacation | ₹1 lakh | No long-term benefit, the stress of repayment |
Fact: India’s debt is 40.1% of GDP, low compared to other emerging markets but high relative to GDP per capita.
Conclusion:
Understanding the difference between good and bad liabilities is crucial for your financial health. Imagine this: If you take a personal loan in Bangalore to start a small business, and your business grows, you’ve made a smart decision. On the other hand, if you borrow money to buy expensive gadgets you don’t need, you’re only adding bad debt to your life.
In conclusion, ask yourself, “Will this debt improve my future or generate income?” If yes, it’s likely a good liability. If not, reconsider borrowing. Thoughtful management of liabilities leads to a stronger financial future.
