Smart Debt Management — Repay Faster, Borrow Better, Invest Wisely
Debt doesn’t have to be a life sentence. Use the right sequence: protect income, kill high‑interest loans, keep DTI under control, and still invest for the future.
What Is Personal Debt?
Money you borrow for consumption or assets — from credit cards and BNPL to home and education loans. Not all debt is equal: some builds your net worth, others drain it.
Good Debt vs Bad Debt — Quick Checklist
| Question | If Yes → Likely Good Debt | If No → Likely Bad Debt |
|---|---|---|
| Funds a productive/appreciating asset? | Home, education, business | Gadgets, vacation, lifestyle |
| Improves future income or utility? | Skill/degree, essential tool | Impulse upgrades, status buys |
| Interest lower than expected return? | Home loan < long‑term equity return | Credit card 30–42% p.a. |
| Secured with collateral? | Secured loan | High‑rate unsecured |
| EMIs < 25–30% of income? | Safer DTI | Debt trap risk |
Types of Personal Debt (India)
| Debt Type | Typical Interest | Secured? | Remarks |
|---|---|---|---|
| Credit Card Outstanding | 30–42% p.a. | No | Pay in full immediately; never revolve |
| BNPL / App Loans | 18–36% p.a. | No | High charges; avoid for consumption |
| Personal Loan | 12–20% p.a. | No | Use sparingly; plan fast prepayment |
| Car/Two‑wheeler Loan | 9–13% p.a. | Yes | Asset depreciates; keep tenure short |
| Education Loan | 8–12% p.a. | Usually | Good if degree lifts income; claim deductions as eligible |
| Home Loan | 8–9.5% p.a. | Yes | Potentially good; mind DTI & prepay strategically |
| Gold/Loan against Securities | 8–12% p.a. | Yes | Short‑term liquidity; watch margin risk |
Prioritise Repayment — Methods that Work
Avalanche (Mathematical)
Pay highest interest first (credit card → personal loan → auto → home). Lowest cost, fastest overall.
Snowball (Behavioural)
Pay smallest balance first to build momentum. Costs a bit more, but higher adherence.
Hybrid
Clear tiny balances fast, then switch to avalanche for big savings.
Debt‑to‑Income (DTI): Keep It in the Safe Zone
DTI = Total EMIs ÷ Net Monthly Income. Aim for < 25–30%. 30–40% is caution; >40% is danger and limits future borrowing.
Can You Invest While in Debt?
- Always maintain an emergency fund (3–6 months) before aggressive prepayment.
- Never invest while carrying 20%+ interest debt — repay first.
- Continue mandatory/exceptional value contributions (e.g., EPF/PPF), even with a home loan.
- For loans ≤ 9–10%, investing may make sense if your expected post‑tax return is higher and DTI is healthy.
- Use windfalls (bonus, ESOP sale) to wipe high‑rate loans.
Real‑World Scenarios (What to Do)
| Situation | Suggestion |
|---|---|
| ₹3 lakh credit card @ 36% | Stop investing; repay immediately. Consider 0%/low‑rate balance transfer (short tenure). |
| Home loan 8.5% + EPF 8% + equity SIP 12% | Keep EPF & equity SIPs; prepay home loan gradually if DTI > 35%. |
| Education loan 10% with strong job prospects | Pay regular EMIs; continue diversified SIP; prepay with increments. |
| Car loan 12% + FD 6% | Break FD and prepay car loan; rebuild emergency fund via SIP. |
Calculator: Repay Loan or Invest?
Bottom Line
Destroy high‑interest debt, borrow thoughtfully for productive assets, and let investments grow once your DTI is healthy. Money stress fades when cash flows and choices align.
Education only; not investment advice. Interest rates, tax rules, and product terms change — consult current scheme documents and your advisor.