An individual or a corporate that avails home loans from the bank is known as debt. The amount which is pending to be paid to the bank is known as debt. If the borrower can repay easily, the debt is known as good debt, while the debt which the borrower is unable to repay easily is known as bad debt. Having a good debt is a healthy sign for an individual as the borrower avails loans for the betterment of livelihood and also can enjoy the benefits it, for example, if the home loan is availed then it shows that without having sufficient amount in bank balance, the borrower can buy their own house and are repaying the installments from time to time as and when the salary gets credited. At the same time, bad debt means that an individual can avail of the loan, but the borrower cannot repay the loan amount. The consequences of the bad debt are that the borrower may have to vacate the property & also, the CIBIL score of an individual may get spoilt due to the bad debt.
The individual with a good CIBIL score who can repay the installments on time can enjoy the benefits of the good CIBIL score. The benefits of a good CIBIL score are that the individual can easily avail of even future loans and any other kind of credit like credit cards or other financial products like personal loans, business loans, or car loans. Banks are keen to provide loans to borrowers who are financially stable and are in a position to repay the debts on time. The banks charge a penalty to the people who are into bad debt as the delay in payment of installments can lead to a penalty being charged by the lender. Bad debt also affects the balance sheet of the lenders as the non-performing assets of the bank increase. Good debt can also lead to an income tax rebate which the borrower can avail. During tax filing, the borrower has to show the receipts of the loans installments being paid, and thus that tax benefits can be availed. While as in the case of bad debts, tax benefits cannot be availed as the borrower defaults the installments. Bad debt usually occurs when the individual has poor financial planning or else due to job loss, or a loss suffered by an entrepreneur or else in the rare case can be willful defaulters as well.
Features about good debt in home loans
If the home loan is availed for the purchase of the property while having a sufficient amount of money in a bank account and also if the borrower is having a sufficient amount of salary to repay the debt, then it is known as good debt.
· Improved credit score:
If an individual can repay the loans installment on time, then an individual’s CIBIL score improves. Thus, this can make it easy for an individual to easily avail loans or any other form of credit by the lender. Thus, having good debt can also make more additional improvements in an individual’s credit score as it helps an individual prove that the loan has been taken and is repaid on time.
· Benefits in availing income tax rebate:
The borrower can avail of income tax exemption under income tax act 80C. Thus an individual has to provide proof of the income tax being filed. Thus in the case of availing exemption also a good debt is beneficial.
Features of the bad debt in home loans
When the value of the building gets depreciated due to becoming dilapidated is also known as bad debt. And also, if the loans have defaulted, then, in that case, it is known as bad debt. The value of the loans which is not recoverable is called bad debt in home loans.
· Spoilt credit score:
The credit score may get spoilt if the loan taken by the individual turns into default or bad debt. An individual, in that case, may have to surrender the property to the bank for non-repayment of the dues, and an individual cannot avail of future credits.
· No benefits in income tax:
Income tax benefits cannot be availed in case of bad debts or the defaulted loans. The income tax department does not provide tax benefits on loans default.
· Spoilt reputation:
The reputation of an individual may get spoilt as in case of default of home loans; no other lender would provide the future credits to the borrower. Even if some lender rarely approves the loan, then, in that case, the interest rates charged could be far higher. Thus the image of an individual gets spoilt. Also, the property for which the loan is being taken may get sealed by the lender, which creates a bad reputation in society.
There is a major difference between the good debt in home loans and bad debt. Good debt is a healthy financial status sign for an individual, while bad debt is a negative sign for an individual. It is always better to have good debt rather than bad debt.