Thursday, January 13, 2011

How to Build Wealth Using Loans?

How to Build Wealth Using Loans?

Do you know that it is possible to build wealth by using Loans? Well, you may be surprised by this statement. You may ask that how can it be possible to build wealth by borrowing money?
In fact, the golden financial advise of personal finance is – Get out of debt and stay away from new debt and cut down all of your credit cards.

Well, the above personal finance advise is for the consumers and financially illiterate people who have bad spending consumer habits.

If you know how to read financial statements than you will realize that basically there are two types of loans (Debts). One is a good loan and one is a bad loan.

A Bad Loan is one which is used to finance the liabilities and consumer expenses such as Cars, Laptops, Credit card consumer spendings and shoppings, Foreign vacations…etc..

While A Good Loan is one which is used to finance assets such as Business, rental property, education or any other kind of asset. Not only this but a good loan is one which is used to protect the long term investments also. Let me give you an example of it.

Say for Example, you have invested in a real estate plot for a time horizon of 10 years. But after 5 years, you suffer a heart attack and you need some emergency cash. Now, in this case if you will sell your real estate plot than it will not only attract huge capital gains tax but also you will have to liquidate it before the completion of your time horizon. So you will miss all the future capital gains also.

So better to take some short term loan for this purpose. Because here your this loan is basically to protect your long term investment from liquidating.

Now, suppose you want to start your own business out of scratch and you don’t have any money. And you borrow this money from Banks, friends and relatives. Well, this is a good loan because it is going to finance the asset (Your Businesses) which will generate income in the future.

Now, suppose you want to buy a luxurious car and you take a car loan to finance your car than its your bad loan. Because a newly bought car will loose 60% of its value in first 4 years you buy it. And not only this but a car is not an asset so it will not appreciate and generate any kind of income for you.
So understand the difference between good and bad loans and always use loans to finance assets and not the liabilities and build enormous wealth for you.

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