Leveraging Debt

In January 2010, I had written down many new year resolutions, and one of them was eliminating debt. In my opinion, debt has to be dreaded, not simply because you have to pay more later, but you don’t ever get to know the reality. Usage of credit card is quite gratifying. In most cases, however, it’s unnecessary and expensive. The more you borrow, the more you have to pay.

On the other hand, businesses use debt to generate profit. They, with the help of huge research team, borrow money and invest in products that would provide guaranteed results. I like this idea. If you know few products that would certainly derive benefits, borrowing money ad investing it is okay.

There are few things you and me can buy borrowing money, which can be used in our day to day life. Let’s check if it proves to be profitable or a loss.

Car

Buying a new car on loan is certainly a wrong decision. Let alone earning profit from your investment, you lose considerable amount as depreciation in initial two years. Besides, you have to pay expenses for maintenance, repair, and fuel for the vehicle. Going into debt simply to buy a car is not wise. Even before paying off your car loan, you would get rid of your car. So, how can it be beneficial? Borrow money to buy car only if it’s very important and urgent.

House

House is considered to be a good investment product. The fact is, however, it appreciates only at par with the inflation. So, the actual profit is not much. Besides, a house is quite similar to a car, wherein you have to spend lots for maintenance, repair, decoration, and so on. But most people don’t have hundred thousands of dollars stashed in their houses. So, we all borrow money to buy a house.

Student Loans

Education is an asset that cannot be measured in terms of ROI (Returns on Investment). When you pay money for tuition, you gain knowledge, generate skills, and build personality, which helps you to get a job, and think things though. Borrowing money for education is certainly a good investment as it help you to earn money in future. You leverage debt to generate higher benefits. So, going into debt to achieve higher education is justifiable, and worthwhile.

Buy a House to Rent

If you borrow money to purchase a new house, only to rent it, it’s a good investment. However, before you come to this conclusion, you will have to ascertain how much you would spend on maintenance and repairs, and how much you would earn. In most cases, this is a good investment.

Stocks and Mutual Funds

Many traders borrow money to invest in stocks and funds, and expect the price to augment, so they can repay the loan and keep the rest. This is probably a very good investment, as you can earn money without using your own money. However, if the price falls, you will have to put your own money to repay the loan. Hence, before you decide to take a loan to invest in stocks, make sure you understand the market, its fundamentals, and current trends.

Leverage must be used if usage of borrowings is done to gain profit, or at least it doesn’t cost you more than repayment of loan including interest. Playing with leverages, however, is quite dangerous. If you get it wrong, you can lose all your belongings including your house. Hence, make sure you don’t borrow big if you are not sure about your investment returns.