Summary of this article
Check if each loan still serves a meaningful purpose or requires restructuring.
Ensure your EMI-to-income ratio stays within a safe 30–40 per cent of monthly earnings.
Review interest rates, fees, and credit score to spot refinancing or correction opportunities.
Prioritise prepayments on high-cost loans while maintaining sufficient liquidity.
As we close another year, it’s the perfect time to pause and assess one of the most important aspects of your financial health - your debt.
A debt check is like an annual health check-up - it verifies that your borrowings are intentional, under control, and support your long-term financial goals.
Too much debt can create financial stress and emergencies.
Too little, or avoiding all forms of borrowing, can also slow down asset creation and limit your ability to grow.
The key lies in planned, responsible debt, one that helps you grow instead of holding you back.
Key Points For Debt Check:
1. Define The Purpose Clearly
Every loan should have a clear reason, like asset building (home, business), emergency needs, or essential lifestyle improvements. “If your debt doesn’t serve a meaningful purpose, it’s a red flag. Intentional borrowing builds wealth; emotional borrowing builds worry,” says Akhil Rathi, Head – Financial Advisory at 1 Finance.
2. Understand Good Debt vs. Bad Debt
Not all debt is harmful.
Good debt helps you create long-term value or income such as a home loan, education loan, or business loan. These contribute to wealth creation or personal growth.
Bad debt is short-lived and consumption-driven, like credit card bills, personal loans for lifestyle expenses, vehicle loans or BNPL (Buy Now, Pay Later) purchases. These drain your finances without adding future value.
3. Borrow The Right Amount
Borrow what you need, not what you qualify for. “Financial institutions may offer higher limits, but over-leverage can create long-term pressure on your monthly cash flow,” informs Rathi.
4. Understanding The True Cost Of Borrowing
Look beyond the interest rate and consider processing fees, insurance add-ons, and prepayment penalties. Compare offers periodically, and refinance if rates have dropped or your credit score has improved.
5. Check Your EMI-To-Income Ratio
Your total EMIs (home, car, personal loans) should ideally stay within 30–40 per cent of your monthly income. Higher ratios reduce your ability to save and invest.
6. Differentiate Between Needs and Wants
Use debt for value-creating needs like education or homeownership, not for short-term wants like vacations or luxury items. Financial maturity lies in prioritising essentials over impulses.
7. Review Your Credit Score
Maintain a healthy credit score (750+). Review your credit report annually for any discrepancies or overdue accounts that may affect your eligibility.
8. Plan Prepayments Wisely
If your income has increased, or you’ve received bonuses, consider making partial prepayments. Always focus on reducing the tenure, not just the EMI, as this helps cut down the total interest cost significantly. However, before prepaying, check how much interest is still due on your loan.
“If a major portion of the tenure is pending, prepayment makes strong financial sense. But if only a few years are left and the interest portion has reduced, continuing the loan and deploying your funds elsewhere (like investments or emergency reserves) could be more beneficial. The goal is to balance liquidity and interest savings smartly,” advises Rathi.
9. Avoid The Trap Of Easy Credit
BNPL apps, credit cards, and overdrafts often lead to invisible debt. Use them only when you can repay in full each month, not as an extension of income.
10. Evaluate Fixed vs. Floating Interest Loans
In a rising-rate environment, fixed-rate loans offer stability. When rates are expected to fall, floating rates may save costs. A year-end review can highlight opportunities.
11. Create a Debt Repayment Calendar
List all your EMIs, debit dates, and tenures. It helps prevent missed payments and gives you a timeline for becoming debt-free.
Final Thought:
Let 2026 begin with clarity, not clutter. “A well-structured debt strategy doesn’t just reduce interest costs, it improves credit health, strengthens confidence, and builds peace of mind,” says Rathi.
Your year-end debt check isn’t about avoiding loans; it’s about keeping them efficient, meaningful, and under control, turning debt from a burden into a tool for growth.
