Good Debt vs Bad Debt: Using Leverage to Build Wealth

The "Debt is Evil" Myth

Growing up, our parents told us: "Loan mat lena beta. Debt is slavery." They were half right. Bad Debt is slavery. Good Debt is a ladder.

Billionaires don't use their own money to build companies. They use Debt. Apple sits on $100 Billion cash but still takes loans. Why? Because debt is cheaper than equity.

Chapter 1: The Simple Litmus Test

How do you know if a loan is "Good" or "Bad"? Use this formula:

ROI (Return on Investment) > Interest Rate = GOOD DEBT ROI (Return on Investment) < Interest Rate = BAD DEBT

Example 1: Home Loan (Good)

• •Loan Amount: ₹50 Lakhs @ 8.5% Interest.
• •Asset: A House.
• •Returns: Capital Appreciation (5%) + Rental Yield (3%) + Tax Benefits (30% slab benefit).
• •Verdict: Effectively, you are borrowing at ~6% to own an asset growing at ~8%. You are making money using the bank's money.

Example 2: Credit Card (Toxic)

• •Loan: Buying an iPhone 16 Pro Max on EMI.
• •Interest: 16% to 45% (if you miss payment).
• •Asset: A Phone.
• •Returns: -20% depreciation the moment you open the box.
• •Verdict: You are paying interest to lose value. This is financial suicide.

Chapter 2: The Power of Leverage

Leverage allows you to control a large asset with a small amount of money.

Scenario: Buying a ₹1 Crore Property

• •Option A (Cash): You wait 15 years to save ₹1 Cr.
• •Option B (Leverage): You pay ₹20 Lakh Down Payment. Bank pays ₹80 Lakh.
  • •If property price rises 10% next year (to ₹1.1 Cr), you made ₹10 Lakh profit.
  • •Your ROI: ₹10 Lakh profit on ₹20 Lakh Investment = 50% Return!

Leverage magnifies returns. But be careful—it also magnifies losses.

Chapter 3: Types of Debt Ranked (Best to Worst)

1. •Education Loan: Best. Investing in yourself has infinite ROI. Plus, Section 80E makes interest tax-free.
2. •Home Loan: Good. Forces savings, builds equity, tax efficiency.
3. •Car Loan: Neutral/Bad. A car is necessary for work, but it depreciates. Keep tenure short (< 3 years).
4. •Personal Loan: Bad. High interest (11-14%). Use only for medical emergencies.
5. •Credit Card Debt: Toxic. Interest rates of 40%+. Only "revolvers" pay this. If you can't clear the full bill, cut the card.

Chapter 4: The 30% Rule

Never let your total EMI outgo exceed 30% of your Take Home Salary.

• •Salary: ₹1 Lakh.
• •Max EMI: ₹30,000.
• •If you cross this, you become fragile. One job loss, and you are bankrupt.

Conclusion

Don't be afraid of Debt. Be afraid of unproductive Debt. "Rich people use debt to get richer. Poor people use debt to look richer."