Borrowing is a tool. Used well, it helps you study, buy what you need for work or handle an emergency. Used badly, it quietly takes a share of your future income. Here is how to tell the difference.
Good debt and bad debt
A useful test: will this loan increase my future income or save me money?
- Usually reasonable: an education loan for a recognised course, a laptop you need for your degree, a skill course with clear career value.
- Usually risky: borrowing for gadgets, holidays or lifestyle spending, or borrowing to repay other debt.
Understand the real cost
The headline interest rate is only part of the story. Look at:
- Processing fees and other one-time charges
- The annual percentage rate (APR), which includes fees
- Late payment charges and penal charges
- Tenure: longer means more total interest
Regulated lenders must give you a Key Fact Statement (KFS) before you sign a retail loan. It summarises the APR, fees and repayment schedule in one place. Read it.
Buy now, pay later and instant loan apps
BNPL and app-based loans are easy to take and easy to forget. Be careful:
- Short-term loans with fees can have a very high effective annual cost.
- Missed payments may be reported to credit bureaus.
- Only borrow from lenders regulated by the RBI or apps partnered with a regulated entity. Unregulated apps have been linked to harassment and data misuse.
Five questions before you borrow
- Do I need this now, or can I save for it?
- What is the total amount I will repay?
- Can I afford the EMI in a bad month?
- Is the lender regulated?
- What happens if I pay late?
Key takeaways
Borrow for things that build your future, read the full cost, stick to regulated lenders and never borrow more than you can repay. See also: how EMIs work.