When you think about debt, it probably brings to mind stressful scenarios where you don’t have enough to get by, and you need to borrow from others to make ends meet.
However, in some cases, taking on debt can lead to profit in the long run. We have a look at where this applies, and we consider whether you should choose this route or not.
Tip: If your debt is already out of control, start debt consolidation today to help you move forward.
Using debt to make money
Acquiring or improving an asset is one of the main ways that debt can generate profit. Here are some of the top ways in which this can be done.
- Home Loan. Taking out a home loan is an incredibly long commitment. But, once the property is paid off, you can rent it out, make back the money you spent, and slowly start making a profit.
- Personal Loan. You can use this kind of loan for anything you choose. If, for example, you use it to pay for renovations on your home, this would increase the value of your property and therefore, potentially, your financial position.
- Business Loan. You can use this money to kickstart a business idea. At first it would be a major cost, but if your business takes off, you will start to see gains.
There are many other creative ways you can use debt to your advantage. You just need to be willing to take on the burden of debt for a period of time so that you can eventually reap the rewards.
Note that you must never take on debt that you cannot afford. If you can't meet the monthly repayments, then this is not the right option for you. If this sounds like you, rather consider how to choose a savings account that will grow your money.
Should you choose this path?
According to Hayley Parry, money coach and facilitator at 1Life’s Truth About Money, using debt to make money is always going to be a risky strategy.
“This means that you need to be 100% sure that you can afford that risk – not only financially but also emotionally – if you were to lose the money you think you stand to gain,” says Parry.
For example, imagine you buy an investment property and you can’t find a tenant – or worse, you can’t evict a non-paying tenant.
“If this happens, you need to ensure you can still afford to pay the bond, the municipal fees and rates, and the legal costs,” says Parry.
On top of this, she says you should consider the time and stress you may suffer from the situation until it’s resolved, and you may not receive the income you anticipated.
“To counter this risk, I suggest you ensure you’ve got a good understanding of what’s involved. This is obviously where a good financial education is invaluable,” says Parry.
She recommends consulting with experts or senior members within your community who you’ve seen successfully utilise a strategy you’re considering. Find out whether they can mentor or advise you as you embark on this journey.
Remember, you can’t take out a loan without a good credit score. Check yours here.