What Is Debt – Types Of Debt And Their Financial Implications

Debt is money you borrow when you can't afford something you need or want immediately.

You must repay it later, usually with extra charges called interest, to the lender or business.

Let’s say Rohit, a 28-year-old working professional, earns ₹45,000 per month. Sounds decent, right?
 

• He pays ₹12,000 EMI for his bike loan
   
• ₹8,000 on credit card bills from shopping last year
   
• ₹5,000 towards an education loan
   
• That’s ₹25,000 gone over half his salary
   

Now, with just ₹20,000 left, he must manage rent, food, transport, and savings. He often skips outings, can’t save a penny, and even missed one EMI last month, hurting his credit score.

Debt helped him at first, but now it’s hurting more than helping. Isn’t it interesting how quickly useful loans can become a burden if not managed correctly?

That’s exactly what this blog is about: understanding debt, its types, and how it truly impacts your financial health.

What is Debt?

Debt is the money you borrow from someone when you can’t afford something right away. You must repay the borrowed amount later, often with some extra money called interest.

Let’s understand it with the help of an example:

Let’s say Riya wants to buy a mobile phone that costs ₹20,000, but she only has ₹5,000.
She borrows ₹15,000 from her friend and promises to return it in 3 months.

Her friend says, “You must also pay ₹500 extra as interest.”

So, at the end of 3 months, Riya has to return:

• ₹15,000 (the money she borrowed)
• ₹500 (extra interest)

Total amount Riya will repay = ₹15,500

This ₹15,000 is debt, and the ₹500 is the cost of borrowing that money. Debt helps you get what you need now and pay later—but with a little extra.

Major Types of Debt:

1. Personal Debt:

Personal debt is money you borrow for personal or household needs, like shopping or education. It includes credit cards, home loans, and student loans, and must be repaid over time.

Let’s understand it with the help of an example:

Let’s say Aman wants to buy a new washing machine that costs ₹30,000, but he doesn’t have enough money right now.

He uses his credit card to buy it and decides to pay back in 3 monthly instalments. His bank adds ₹1,000 interest over those 3 months.

So, Aman will pay:

• ₹10,333 each month for 3 months
• ₹10,000 for the actual amount and ₹333 extra as interest every month

Total repayment = ₹31,000 (₹30,000 washing machine + ₹1,000 interest)

This borrowed ₹30,000 is personal (or consumer) debt, because he used it for a household item. It helps him get what he needs now and repay slowly, but with some added cost.

2. Mortgage Debt

Mortgage debt is money you borrow to buy property like a house or land. If you don’t repay, the lender can take and sell your property to recover the loan.

Let’s understand it with the help of an example:

Suppose Priya wants to buy a small house that costs ₹40,00,000, but she only has ₹10,00,000.
So, she takes a mortgage of ₹30,00,000 from a bank for 20 years.

The bank charges 7% interest per year. Her monthly EMI (equated monthly instalment) becomes about ₹23,000.

So, over 20 years, Priya will pay:

• ₹23,000 × 240 months = ₹55,20,000 in total
• This includes the ₹30,00,000 loan and ₹25,20,000 as interest

If Priya misses payments, the bank can take her house and sell it to recover money. This is mortgage debt, borrowing a large amount to buy property, repaid slowly with interest.

3. Business Debt

Business debt is money a company borrows to fund its operations, growth, or expansion plans. It includes loans, bonds, or credit used to buy equipment, hire staff, or manage cash flow.

Let’s understand it with the help of an example:

Imagine a small company, Riya Foods Pvt. Ltd., wants to expand its business by opening a new kitchen.

The total setup cost is ₹15,00,000, but the company has only ₹5,00,000 in savings.
To cover the remaining amount, it takes a business loan of ₹10,00,000 from a bank for 5 years at 10% interest per year.

The company agrees to pay monthly instalments of around ₹21,250.

So over 5 years, the total repayment will be:

• ₹21,250 × 60 months = ₹12,75,000
• This includes ₹10,00,000 principal and ₹2,75,000 interest

This borrowed ₹10,00,000 is business debt, because it is used to grow the company. Such debt helps businesses invest in growth now and repay gradually over time.

4. Education Debt

Education debt is money borrowed to pay for college or university fees and related expenses. The loan covers tuition, books, hostel, and other costs, repaid after studies are completed.

Let’s understand it with the help of an example:

Let’s say Ankit gets admission to an engineering college where the total yearly cost is ₹2,50,000. This includes tuition fees, hostel charges, books, lab fees, and other academic expenses.

Ankit takes an education loan of ₹10,00,000 from a bank to cover all 4 years of his course.
The bank pays the amount directly to the college every year at the start of the semester.

Ankit doesn’t have to pay anything during his studies. After he gets a job, repayment begins with an interest of 8% per year, in easy monthly instalments.

If his monthly EMI is ₹12,000, he will repay around:

• ₹12,000 × 100 months = ₹12,00,000 in total
• ₹10,00,000 principal and ₹2,00,000 interest

This loan is education debt, taken to fund studies now and repaid later after gaining employment.

Good Debt vs. Bad Debt 

Understanding the difference between good debt and bad debt is essential for making smart financial decisions. While good debt can be a stepping stone to growth, bad debt can pull you backwards.
 

Use debt wisely: borrow with purpose, repay with discipline, and always ask Will this debt improve my future or just satisfy a moment?

How Does Debt Affect Financial Health?

Too much debt can cause stress, limit savings, and affect your ability to meet daily needs. It may harm your credit score, future borrowing power, and overall financial stability.

Let’s explain it with the help of an example:

Let’s say Rahul earns ₹50,000 per month. Out of this:
 

• ₹15,000 goes towards a personal loan EMI
   
• ₹10,000 for credit card payments
   
• ₹5,000 for an old education loan
   

That means ₹30,000 of his income is used just to pay debt every month.
He has only ₹20,000 left for rent, groceries, bills, transport, and emergencies.

Because most of his salary goes into repaying debt, Rahul:
 

• Can’t save for future goals
   
• Struggles with monthly expenses
   
• Feels constant stress and anxiety
   
• May miss payments, lowering his credit score
   

This situation shows how too much debt can quickly lead to poor financial health, mental pressure, and reduced quality of life. Managing debt wisely is key to staying financially and emotionally stable.

Conclusion

Debt isn’t always bad. It can help you buy a home, study, or grow your business. But if you borrow too much or spend carelessly, it can cause stress and money problems. Always borrow only what you truly need and make sure you can repay it. Use debt to move forward—not to struggle.

FAQs:
 

Q1: What is a good use of debt?

A good debt helps you build wealth or income, like student loans, business loans, or mortgages.

Q2: How do you manage debt?

Pay minimum amounts on all debts, but focus extra money on the one with the highest interest.

Once it’s cleared, move to the next highest repeat until all debts are paid off.

Q3: What is the basic rule for total debt?

Your total debt should ideally be no more than 10–15% of your take-home income.
 

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About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.