Debt is not principally bad, in fact if used properly it can help individuals achieve their objectives faster but the misuse of debt can be financially devastating. Many important financial goals like higher education expenses, house purchase, automobile purchase etc. requires the use of loan. While it is nearly impossible in today’s economy to reach important financial goals without the use of debt, it is important for clients to avoid using it excessively. Managing debt and helping the client avoid excessive debt is a valuable service the financial planner provides to the clients.

If a person takes too much of loan, then majority of future income will be required for the repayment of loans by way of EMIs. This will decrease the saving capabilities and restrict the persons capacity to fund some of the important financial gaols. Hence it always important to stay with in financial boundaries and avoid taking emotional decisions but one should know the financial limits, and this is where the financial planner is a great help.

There are different types of loans available in the Indian market today like home loan, car loan, two-wheeler loan, personal loan, gold loan, credit card loans, cash advances on credit cards, education loan, agriculture loan, small business loan, consumer durable loan, loan against securities etc. Some of these loans are available at reasonable interest rates while most of them charge exorbitant interest rates.

Debt management advise divides debt into two categories Good Debt and Bad Debt. Good Debt is defined as loan taken to build appreciating assets or loan taken for something which will improve your overall financial health, example home loan or education loan where as Bad Debt is defined as loan taken for the purchase of depreciating assets or loan taken to meet up additional expenses or handling emergencies like personal loans, credit card loans, gold loans etc. These are generally high interest loans and should be considered only as the last resort.

Taking a good loan and avoiding bad loans requires a shift in your mentality. Good debt is obtained by making wise decisions about your future. For example, taking an education loan to improve your qualification which may increase your earning potential or going with a reasonable home loan to shift from a rented house to your own house. Avoid taking loan for purchasing depreciating assets or at least keep it minimum possible. It is better to wait and accumulate enough money to purchase depreciating assets like car or consumer durables rather than purchasing it on loans because it will increase the cost of your purchase.

Always pay attention to how much you borrow, just because you are borrowing a good debt instead of bad does not mean that you should borrow excessively. It’s advised to keep your debt-to-income ratio below 35% of your income which means your total EMIs should be less than 35% of your monthly income.

Focus on paying off your bad debts first since they cost you more fees and interest than your good debts and have little or no appreciable value. Pay off your debt as quickly as possible Even if the debt is considered good debt. It will allow you to begin to build wealth. You can pay off your debt quicker than you think if your money is managed correctly. If you are serious about getting rid of your debt quickly, you will need to set up a budget and debt payoff strategy which allow you to pay additional money to your loans each month without disturbing your other goals. This is an exhaustive exercise as it takes into consideration your income, expenses, curtailing some of your expenses, your assets and their performance etc. hence it is always advisable to consult a qualified financial planner to plot your debt payoff strategy.

There will always be a dilemma whether to pay off loan or invest your surplus money, when and how much loan we should go for, whether to lease or buy an asset. There is no simple answer to these questions. It requires careful evaluation of your current situation as well as the impact of the decision on your future. The financial planner can help you understand the implication of each option and guide you to take the right decision.