Loans & EMIs (overview)
Debt can build wealth OR destroy it. Know the difference.
Good Debt vs Bad Debt
Good Debt (Appreciating assets):
- Education loan (increases earning potential)
- Home loan (property appreciates)
- Business loan (generates income)
Bad Debt (Depreciating/Consumption):
- Credit card debt (36% interest!)
- Personal loan for vacation
- Car loan (car depreciates 15%/year)
Understanding EMI
EMI = Equated Monthly Installment
Formula: EMI = [P × r × (1+r)^n] / [(1+r)^n – 1] Where: P=Principal, r=monthly rate, n=months
Example: ₹10L home loan, 8.5% for 20 years
- EMI: ₹8,686/month
- Total paid: ₹20.8L (₹10.8L is interest!)
Interest Types
Flat Rate: Interest on original amount (misleading!) Reducing Balance: Interest on outstanding (standard for home loans)
Always choose reducing balance loans!
Debt Payoff Strategy
Avalanche Method (Math-optimal): Pay highest interest rate first
- Credit card (36%)
- Personal loan (14-18%)
- Car loan (10-12%)
- Home loan (8-9%)
Snowball Method (Psychology-optimal): Pay smallest balance first for motivation
⚠️ EMI Warning
Total EMIs should NOT exceed 40% of monthly income. If EMIs = ₹30K and income = ₹60K → You're in danger zone!
Test Your Knowledge
Question 1 of 3
1. Good debt is:
💡 Key Takeaway: Loans & EMIs (overview) is a crucial concept for financial success!
Key Takeaway: Understanding Loans & EMIs (overview) is essential for making informed financial decisions.