How to leverage debt to your advantage

Of late, debt has somehow managed to garner a bad name. However, the truth is that debt isn’t inherently bad for you. It is how you use it that matters. Many financial experts have called for judicious use of debt, which can give you a significant advantage in the long term.

But then, the question of how to go about leveraging debt to create an advantage for yourself remains. If you’re someone who is wondering the same, then here are three different ways through which you can use debt beneficially.

1. Use debt to create assets

Borrowing to create an asset might seem like a contradiction to many. However, this process of using debt to create wealth is known as gearing and it is a widely accepted practice. In fact, doing so is recommended by many financial experts.

One of the best things about gearing is that there are multiple ways through which you can use debt to create an asset. The most popular method that many individuals follow is purchasing or constructing a home by taking out a home loan. The home that you purchase would be a very valuable asset that would continue to appreciate over time, making the debt that you took on worthwhile. And once you’re done repaying the debt completely, you can proceed to sell the house at a significantly higher price and realize the gains.

Alternatively, you can also take out an education loan to fund your higher education and improve your employability. This is also one of the many ways to use gearing to your advantage. Here, the education loan is the debt and your enhanced employability is the asset.

And finally, you can also borrow money to invest in the financial markets as well. While this strategy would still allow you to create an asset, it can be very risky due to the unpredictable nature of the markets. Downturns in the market can end up eroding the value of your asset, leaving you to service your debt without any significant gains from it. So, if you’re planning on adopting such a strategy, make sure to first thoroughly understand the different risks involved before proceeding to put your plan in motion.

2. Borrow to boost your credit history

Borrowing to improve your credit history and score is another great way to use debt to your advantage. Of late, financial institutions are increasingly preferring individuals with long credit histories and good credit scores. Possessing both of them can give you a significant edge when it comes to availing credit facilities. 

One of the ways through which you can create a credit history is by applying for and using a credit card. As you continue to use it and repay your bills in full on time, you create a credit history and get to improve your credit score. Alternatively, you can also apply for a consumer loan to purchase an appliance or an electronic gadget. Doing so would also have the same effect.

3. Consolidate your debts by taking on more debt

Taking on more debt to reduce debt is again something that might sound contradictory. However, debt consolidation is a very popular practice that can help you get out of tough situations.

Consolidation of debt works best when you’re riddled with multiple loan obligations with high-interest rates and different payment due dates. By availing a large loan and using the proceeds to settle all your other debt obligations, you can effectively make it easier to manage your finances since you would only have one source of debt to service.

That said when taking out a loan to consolidate debt, ensure that the interest rate on such a loan is lower than your other debts. Otherwise, your debt consolidation exercise may not go as you expect it to.

Conclusion

As you can see, taking on debt to create an advantage for yourself is very easy. That said, remember that debt is still debt in the end and has to be repaid promptly. Delays or failure to repay debt can quickly become a slippery slope and lead you into far greater trouble.

Therefore, if you’re taking on debt, make sure that you can afford to repay it on time consistently till the end of the tenure. Also, it is advisable to refrain from taking on multiple sources of debt at the same time.

For instance, if you’re borrowing to consolidate your debt, consider holding out till you’re done repaying the loan before taking out another one to create an asset. This way, you can not only lessen the burden of debt but also reduce the chances of defaulting on repayment.