Financially secure future is something which we all dream for. To achieve this we work hard for the entire life. Setting financial goals, budgeting, learning money management skills are some steps which lead us to reach this goal. In this path, loans act like demons and hurdles which reduces our speed and further delays our goal accomplishments. Loans are basically borrowed money which needs to be repaid along with the interest. These are also considered as debts. Well, this is the persisting theory about loans and debts.
However, with the changing scenarios, the perception of loans has also changed for many who are taking it as an opportunity to build money. Previously where loans were considered as liabilities, some people are now considering it as leverage.
Difference between Debt and Leverage
Debts are basically money borrowed by someone which is either from a bank, a private money lender or from friends and family. A debt generally comes with an arrangement that gives the borrowing party permission to borrow money under the condition. These conditions include the time period in which it needs to be paid back, the interest rate charged and several other terms.
Whereas Leverage is using borrowed money as a funding source to make more money. This is generally achieved when borrowed money is invested as capital in any business or money-making profile which has the potential to generate returns.
Can a debt be turned into a leverage?
Yes! Debt can be transformed into leverage when the borrowed money is invested for capital gain. Doing this requires a good strategy and risk-taking ability too. Leverage can also refer to the amount of debt a firm uses to finance assets.
Benefits of leverage
- Accelerate your financial growth
- Multiply your wealth
- Can improve one’s financial well being
- Improves your risk-taking abilities
- Improve your quality of life
- Allow you to focus on other aspects of life as you become financially secure.
How leverage improves one’s financial well-being?
When a loan is taken with full planning, analysing spending potential areas to gain maximum return it can surely improve one’s financial well-being. However, some of the steps which need to be taken concerning this are:
Go for a loan when appreciation opportunity is realistic
To convert your borrowing into leverage it’s important to analyse the appreciation opportunities. For example- you want to take a loan to expand your business, so before you proceed with the loan you need to know your business potential after expansion. If you think you can surely make more money by using the borrowed money, then only you should go with the loan.
Don’t go for leverage when downside risk is high
Leverage opportunities exist only when prospects seem uncertain. And when there is uncertainty, there is a risk factor involved. Here, to convert your borrowing into leverage and then to your financial well-being, one should avoid going for leverage when downside risk is high.
Have a plan and a backup option too
Leverage can only be achieved when you have a concrete plan to work on. Always try to be clear with your ideas, have a backup plan for failures. Have proper analysis of appreciation opportunity and loan tenure.
Having a plan to repay your loan over this time is very important.
Leverage is a complex financial tool. The theory sounds great, as the use of leverage can be profitable and uplift your finances. However, if decisions are not made with proper planning, leverage can also lead to a loss.