In today's world, taking out a loan has become easier than ever. Whether it's through banks or mobile apps, loans are readily available in no time. Now, people often take out loans without much thought whenever the need arises. But this is where financial problems often begin, because not every loan is beneficial. In fact, there are two types of loans: good loans and bad loans, and understanding the difference between them is crucial for everyone.

In the digital age, instant loan apps have provided people with quick access to money, but they have also brought high interest rates, hidden charges, and mental stress. Many people take out loans from such apps for small needs and later get trapped under the burden of EMIs. This is why it's essential to understand what kind of loan you are taking before you borrow.

What is a Good Loan?

A good loan helps improve your life. A loan that increases your income in the future, builds assets, or strengthens your career is considered a good loan. The interest rate is usually low, and the benefits become apparent over time.

For example, if you take out an education loan for your studies, and that education leads to increased earnings in the future, that's a good loan. Similarly, a business loan that helps your business grow, or a home loan that allows you to own property, is also considered a good loan. Such loans increase your net worth in the long run, which is why they are called good loans.

Key Characteristics of a Good Loan
In a good loan, the potential return is greater than the interest paid. The EMI is manageable according to your income, and the loan is used for a productive purpose. It becomes a part of your financial growth, not a burden.

What is a Bad Loan?
A bad loan is one that only increases expenses, not income. These types of loans have very high interest rates and often include additional charges. If payments are not made on time, your credit score deteriorates, making it difficult to get loans in the future. Personal loans, credit card debt, loans taken from instant loan apps, or loans taken for non-essential items often fall into this category. They neither create any assets nor provide any beneficial returns in the future.

Why do bad loans become the root of the problem?
Bad loan EMIs put a heavy burden on your finances. Many people take out one loan to pay off another and gradually get trapped in a debt cycle. Stress increases, savings are depleted, and financial freedom is jeopardized.

Good Loans and Bad Loans: What's the Difference?
Basis    Good Loan    Bad Loan
Purpose of taking the loan    : To strengthen the future    , only to meet current expenses
Impact of the money    : increases wealth and income    , increases financial burden
Interest rate    : Relatively low    , Quite high
Long-term benefit

Provides benefits    , increases losses
Income    helps increase income. Does not
Level of risk

Low risk    High risk
Examples    : Home loan, Education loan, Business loan
Personal loan, Credit card loan, Instant app loan

Mental impact    , Security and stability    , Stress and pressure
Future planning    becomes easier    , and increases difficulties

How much loan is right?
When taking a loan, it is important to accurately calculate your income and expenses. For this, the debt-to-income ratio is considered. That is, your total monthly EMI should not exceed 40 percent of your monthly income. If it is below 30 percent, it is considered even better.

Prioritize savings before taking a loan.
Taking a loan for every small need is not wise. It is better to cultivate a habit of saving first. Many expenses can be met without debt by making small plans, SIPs, or creating an emergency fund. Only take a loan when it will truly help you progress in life.

Prudence is the real security
A loan in itself is neither good nor bad. The difference lies in the purpose for which you are taking it. A loan taken with the right information and careful consideration can pave the way for your progress, while a loan taken in haste can become your biggest financial enemy.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.