Suppose you want a ₹20,000 smartphone but have only ₹5,000. You borrow ₹15,000 from a bank, promising to repay with interest. This is an example of debt—borrowing money to pay later.
In India, people frequently borrow for houses, cars, or education. However, debt can be tricky, as repayments usually exceed the amount borrowed, requiring careful consideration.
Fact: Finance Minister Nirmala Sitharaman highlighted India’s strong debt management with a 81% debt-to-GDP ratio for FY22, comparing it to higher ratios in Japan (260.1%), the US (121.3%), France (111.8%), and the UK (101.9%).
What Is Debt?
Debt is borrowing money that you promise to pay back with interest. It allows you to buy things now, even if you don’t have enough money right away.
For example, if you borrow₹1,000 from a friend and agree to repay ₹1,200 next month, the ₹200 extra is the interest, which is the cost of borrowing the ₹1,000.
Types of Debt
There are many types of debt, and each serves a different purpose. Here are some common ones:
| Type of Debt | Example | Interest Rate | Collateral |
| Secured Debt | Home loan, car loan | Lower interest | House, car |
| Unsecured Debt | Credit card debt, personal loan | Higher interest | None |
| Revolving Debt | Credit cards | Varies | None |
| Installment Debt | Home loan, car loan | Fixed rate, regular payments | House, car |
1. Secured debt
Secured debt is when you borrow money and use something valuable, like a house or car, as collateral. If you fail to repay, the lender can take the asset.
For example, if you borrow ₹10 lakh to buy a house and promise to repay it in 10 years, the house is the collateral. If you default, the lender can seize the house.
2. Unsecured Debt
Unsecured debt doesn’t require collateral and is based on your ability to repay, often determined by your credit score. Since there’s no asset to back it up, lenders charge higher interest rates.
For example, if you borrow ₹50,000 through a personal loan with a 15% interest rate, you’ll repay ₹57,500 over time, as there’s no collateral involved.
3. Revolving Debt
Revolving debt lets you borrow up to a set limit and repay as you go, with the option to borrow again. A credit card is a common example.
For instance, if your credit card limit is ₹50,000 and you spend ₹10,000, you can pay back ₹10,000 and borrow again up to the ₹50,000 limit, as long as the balance is cleared.
4. Installment Debt
Installment debt involves borrowing a set amount and repaying it through regular monthly payments over time. A home loan is a typical example.
For instance, if you borrow ₹20 lakh for a 20-year home loan with an interest rate, you might pay ₹15,000 each month. After 240 payments (20 years), your loan would be fully repaid.
Why Do People Use Debt?
People take on debt for different reasons:
- To Buy Big Things: Most people borrow money to buy houses or cars, things that are too expensive to pay for all at once.
- For Education: Many students take loans to pay for their college fees. The government also takes on debt to build schools, roads, and hospitals.
- To Run Businesses: Companies borrow money to buy equipment, expand their businesses, or pay for salaries.
Misconceptions About Debt
There are some common myths about debt:
- All Debt Is Bad: Not all debt is bad. A home loan or education loan can be helpful if it leads to better opportunities.
- Avoid Debt Completely: While it’s good to be careful with debt, sometimes it can be necessary for big things like education or buying a home.
- Debt Consolidation: Loans Are Only For People In Trouble: Actually, debt consolidation loans can be a great way to manage multiple debts and lower interest rates.
Debt Consolidation Loans: A Simple Solution
Imagine having three loans with high interest rates, paying ₹5,000, ₹8,000, and ₹12,000 each month—totalling ₹25,000! What if you could combine all these debts into a single loan with a lower interest rate? Debt consolidation loans allow you to merge multiple debts, simplifying management and reducing interest payments.
Conclusion
Debt can help you buy things now, but it’s important to understand the cost of borrowing.
For example, if you borrow ₹15,000 for a phone and repay ₹16,000, the extra ₹1,000 is interest. Debt consolidation loans can combine multiple debts into one, often at a lower interest rate, simplifying payments. For instance, consolidating ₹50,000 across three loans could lower monthly payments and reduce interest costs.