Debt is an obligation or a duty to pay money to another party. Over time, people have learned to dread and avoid debt. In truth, many people have learned to associate debt with the failure of an enterprise. Many others see it as a consequence of impulse spending.
Debt, however, is the bedrock of an industry spanning trillions of dollars. Debt can also involve payments that are not cash. In this article we are going to look at the scope of debt and how it will work to your benefit, so strap in.
How Does Debt Work?
When you owe someone money or any other agreed-upon medium of payment, then you’re in debt. You are the debtor, while the person you owe is the creditor. To receive credit, you must contract with the creditor in respect of the terms upon which to repay the debt. This credit is called a loan. All loan terms should include the following:
- Period of time in which to pay the debt
- Interest charges over time
- Interest rate
What Is Good And Bad Debt?
Good debt is the debt you leverage to purchase items that will yield money to you in the long run. For example, taking out a mortgage is good debt, because the price of a house increases with time. With this debt, you garner assets that will help you pay off your debt.
Bad debt is debt incurred by purchasing items and things that will give you no economic value over time. These are items that start losing value immediately you purchase them. Doing so will put you in more debt.
Ways You Can Use Debt in Your Favor
While many people are afraid of debt, you can make it work in your favor. Leveraging on debt to get yourself into positions of more economic power is always a good idea. You can acquire assets, start a business or just take out a mortgage. Here are a few ways through which you can make debt work for you.
Utilizing Debt to Help Build Good Credit
As we progress in life, we get to that point where we need to purchase a house and a car. To do so we need to have good credit. Many are misled by thinking that paying off their credit card balance means that they are most eligible. However, this category of persons is classified as “credit invisible”. Because they have NO credit history, potential lenders will not want to do business with you.
To avoid the sort of problems this may bring, it is essential to strategically create debt in some manner, and you satisfy the debts on time. To avoid interest payments on the debt, you’ll need to get yourself a 0% interest credit card. This card will enable you to pay off your debts at a later date without incurring any interest payments.
Utilizing Debt to Start a Business
If you are interested in starting a business then we’ve got news for you. Many of the purchases you are about to make do not come cheap at all. In the course of setting up your business you may be required to make costly equipment purchases, and set up inventory for the business. In addition to normal operating expenses, you will most likely also make drawings for your personal use. As a result, your business will be left with little or nothing.
The best bet for you in this scenario is to secure a short-term loan so that you can have help in covering expenditure costs for the business. Once you get a loan, then you should be on your way to thriving. This is because your attention will be on growing the business since the money to settle all recurring expenditures have been taken care of.
In practice, many people shy away from starting their own business. This is because they are afraid of the risks involved in getting a loan. However, raising the money you need may take a long period, so a better way out would be to apply for debt strategically. Also, remember that interest payments on these debts are tax-deductible.
Utilizing Debt to Obtain Property
Debt is a great way to obtain a mortgage. It may sound ridiculous, but the house that you paid a mortgage for will be worth a lot more in the future. Apart from the mortgage, Debt can also help you acquire income property. The beautiful thing about this is the fact that the interest you will pay will be tax-deductible. This is with respect to both the mortgage and the purchase of income property.
Several people have joined the real estate market by way of debt. All they had to do was use debt to get their first piece of property and flip it. Some others bought a defective property, fixed it, and flipped it. After that, they reinvested the profit and flipped a couple more houses. Before long, they were neck-deep in the real estate game.
Utilizing Debt to Help Fund Your Education
Almost everyone desires to have their educational expenditure shouldered by a scholarship or grant. Scholarships and grants make your life easy and allow you to focus on the business end of the process. Many people get lucky in this regard, but what about the rest? What happens when you cannot afford to pay for school? How will debt help you?
It’s simple; you can use student loans. Student loans are a strategic kind of debt as the skills you acquire by taking out the loans will help you. In the future, getting better jobs will not be a problem for you, and with your higher income you can pay off the debt. It even works better when you obtain federal student loans. You would have to leave school before you could start paying back.
This means while in school you have nothing to worry about, as long as you remain in school.
The Revised Pay As You Earn Plan (REPAYE Plan) and the Pay As You Earn Repayment Plan (PAYE plan) are feasible. Both of these plans are income-contingent as they will be charged based on how much you earn. There is also a limit for loan charges, as you cannot be charged more than 10% of your monthly income.
Ways Debt Can Make You Money
Debt is not just a state of owing money. It is a position that offers significant advantages in multiplying income. There are a ton of ways to make money through debt. They include:
Margin Investing allows you to buy a higher number of stocks than you can afford. If you had $10,000 in your brokerage account, you could decide to leverage debt and open a margin account. Ordinarily, a margin account allows you to deploy up to 50% of the stock purchase price.
That way you would have your $10,000 cash and another $10,000 would be used to finance your margin account. With the money at your disposal, you can now purchase stock worth $20,000 and invest. Upon appreciation of the stock price, you will pay back the loan and keep the profits.
On the flip side, if your account equity does not meet up to a certain limit, your brokerage firm will issue a margin call. If you cannot meet the margin call, your broker will liquidate your position in a stock. That will bring you only losses.
Leveraged Exchange Trading Funds (ETFs) are another good way to make money through debt. With leveraged ETFs, investors and traders only seek to multiply their returns. They can do this by going short or long on a particular index. Some companies make offers on Leveraged ETFs that allow investors to amplify returns up to 200-300%.
These funds give you access to a lot of investment opportunities. You can invest in bonds, indexes, commodities, and sectors. There is a huge chance of extraordinary profit with Leveraged ETFs, and this is mostly possible during market booms.
A downside to it is that if you’re not adept at trading, you’re in a bit of trouble. The same way it makes you profit is the same way it will wipe out your entire investment in a short time.
When it comes to leverage, hedge funds are one of the most common users. With hedge funds, you can generate mind-boggling returns using leverage. Many hedge funds create up to ten times their asset amount in profits. Through leverage, many accredited investors have evolved into multimillionaires. It is a debt leverage option you should consider.
Through short selling, you can make a ton of money by putting up funds against particular security. This you can do by borrowing investor shares and selling them in the belief that the shares will decline. You can make a fortune by timing the decline in stock prices accurately. The disadvantage? Unlimited losses can happen, leaving you with nothing, not even the original investment.
Forex Trading helps you to control lots of currencies with just a little money. In a short time, you can take little sums of money and turn them into large ones. You can also apply leverage to the rate of 100:1. The major disadvantage is that in an event of unmitigated loss, your account can be cleaned out. This can happen as quickly as a couple of minutes.
Should You Utilize Debt?
Many people have negative ideas regarding debt, but now you know better. It’s time to utilize the knowledge you have acquired to generate more income for yourself. We recommend talking with a Financial Advisor as this will guide you on how best to get started and the various loan options available to you.