Can a loan make you rich instead of pushing you into financial despair?

For many people, taking a loan is something they try to avoid. Is this the right action? Could taking a loan actually make you wealthy? Those who manage their investments to a maximum, know that taking loans is the number one way of boosting one's wealth. Before you go take a loan and land yourself in financial despair, please read my reasoning. Also don't take this as advice but as an eye opener.

What is the typical way people use loans?

Before we can understand how loans can make you more wealth, we need to understand how loans typically work against you. It all starts from a situation of not thinking it through. The typical way people take a loan is to finance things that they don't have the money for otherwise. Well that is sort of the point of taking a loan, however, they don't think of how to turn the loan into their benefit. Let's get one thing straight: the bank wins always. Yes, that you cannot get around. But what people fail to notice is that they just accept that they will loose by taking a loan and fall pray to the trap a loan creates. When you take a loan, you need to pay it back, with interest. So many who think they have it figured out just start paying it back. For the majority this won't result in anything bad, they'll pay a part of their salary every month and eventually they'll have paid the whole loan back and own the house or whatever they invested in, but by that time they've paid too much for the house and never got anything in return, the price of the house probably hasn't gone up as much as the interest they paid for the loan. So in the end they'll probably have overpaid for it.

How do you use a loan to benefit you?

Instead of just accepting that you'll be worse of after paying back the loan and hurrying to pay it all back, you could use the loan as a tool to create more wealth. First of, you need to calculate. How much do you need to pay back per month? How much can you save a month? How much will be left over after paying the loan, the interest, food, etc.? So how much can you actually save per month? Is there a possibility to increase the length of the loan to enable you to save more? Yes, this is where some of you might be like: "Wait why would you want to pay a loan for a longer time?". Let me explain. Unless you're taking a stupid loan, you won't be paying as much interest as you're savings can grow when invested. So all the money that you can save and not pay back the loan with, you can invest and make it grow.

This will lead to a situation where you'll be creating wealth in two ways.

One: Paying back your loan. Each time you pay back your loan, you will own more of what you invested in (oh right, you also need to buy something that is an investment not a car with your loan).

Two: When you save and invest, your wealth will increase.

The way this will then play out is that you'll be making money by not having to worry about saving for that investment you wanted to have, usually a house for the average person. Still confused? Ok, let we visualize this for you:

Ok, this is not an accurate representation, so don't take it as such, but what it should show you is how your loan will decrease and how your invested savings and your total wealth will increase because of the loan you took and used wisely. This shows you that by saving only and investing you can already get a nice compounding effect going on, but by adding a loan to the equation the curve won't be as high, but your wealth will be higher and isn't that better?

How to maximize the use of loans?

The last representation was only to show you how you can change a mortgage or so on to a beneficial mechanism. But what if you made the loan an investment tool? That would be called leverage.

Instead of taking a loan to pay of your house, you could take a loan to increase your earnings from investments. The way is similar to what I explained earlier. However, the difference is that when you have a loan on an investment, the investment by definition is expected to grow also, the loan won't (if you don't calculate the interest, which obviously will make the loan grow). So say you for example buy real-estate and rent it. You could use loans to leverage those real-estate purchases. So if you're own money would increase say 6% by buying the real-estate without loan. Buying the real-estate with 50% loan would mean that now your own money is growing at 12% interest in the beginning. From where I come from, you can deduct the interest of the loan from the income you gain from real-estate investments (rent paid by the person renting your real-estate) and if you can do it here, the chances are you can do it where you're from also. Because usually we pay tax for everything here.

So now you've turned your fear of life long debt into potential lifelong tool to make you wealthy! How awesome is that? Did I open your eyes to new possibilities? Was something left unclear? Comment below if you'd like to know something or have something to add. This is only an introduction to the topic, please regard it as such :)

Disclaimer:

I believe this works, but I want to remind you that this is not investment advice. It is only to open your eyes into the possibilities, instead of seeing what you're used to seeing. I cannot guarantee that things would work out as planned etc. So please do your own research and risk evaluation before getting into the leverage business of loans. It is always risky.