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Tata Capital > Blog > Loan for Home > Good Debt & Bad Debt – What is Home Loan?

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Good Debt & Bad Debt – What is Home Loan?

Good Debt & Bad Debt – What is Home Loan?

This might sound odd but yes, loans can be good as well as bad.

Though this is not a technical difference between loans, the fact is that this differentiation is fairly useful, when it comes to managing personal finances.

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Experts are of the view that loans which are used to purchase assets that increase in value (with time) is good debt. Whereas loan used to purchase depreciating assets (like cars) or for discretionary expenses (holidays) are considered bad debt.

Now what kind of debt is a home loan?

This is a tricky question. No doubt real estate is considered to be a productive asset as generally, its value increases with time. But it’s debatable whether one can even consider their self-occupied house as an asset or not. This is because one will sell their house even if it appreciates in value. Isn't it?

But if house is being considered to be an asset, you can easily consider a home loan to be a good debt.

If you are a real estate investor who buys property solely for capital gains, then home loan is a good debt for you. It is being used to purchase an asset that is expected to increase in value in near future.

But let’s try to understand what bad debt is? A bad debt is the loan that is used to spend money on depreciating assets like vehicles, mobiles, gadgets, etc. or for discretionary expenses like international holidays, partying, etc.

As already mentioned, there is no practical utility of this concept of good or bad debt. And there is nothing to be gained from debating about good vs. bad debt. But in general, bad debts are costly forms of loans. So if you can avoid, then you should not take these loans in first place. But if you have taken these loans and have surplus money, then you should try to clear it off as soon as possible.

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