There are many ways to use debt in a smart way.

Debt when used correctly, is a very useful tool for creating wealth and/or producing income.

The most common way is when people borrow to buy a house. For many people, this will their home for many years. Borrowing for a home gets them out of the rental market and means the money they are paying is going towards an asset that they own. As the years pass, and they continue to make payments, the loan value decreases whilst (hopefully) the property value increases which results in an increase to the equity in the home.

Other assets

Another way to use debt in a smart way would be to purchase some form of income producing asset such as a car or other equipment. For many people, even borrowing to buy a car to get them to and from work is necessary and also a smart way to utilise debt as a tool.

Property Investor

Some people take property ownership a step further and rent a property out so it becomes an investment. They use the rent payments from the tenant to service the loan and to produce an additional income stream. The key is to find a property that will maximise the return (through rental payments to you the owner) without unduly compromising the capital growth rate that could be expected in the timeframe you want.

A second way to consider sensible debt is to undertake debt consolidation.

Debt consolidation is where you might have borrowed money for other purposes such as a car, boat or holiday. Typically, these assets are not income producing like an investment property and the interest rates charged are often higher than that charged for property. The key to debt consolidation is the ability to refinance more expensive debt (that means higher interest rates) into one bigger loan at a lower interest rate. This is often done by paying out the expensive debt and adding it to the cheaper property debt. The reason somebody would do this is to reduce their total monthly repayments. This can occur due to different interest rates for different loan types. Property loans typically incur lower interest rates because the property itself is seen as a secure (low risk) asset to the lender.

The important thing here is to avoid racking up more consumer debt on those more expensive borrowing options such as credit cards.

 

The information provided on this website is general in nature and is for informational purposes only. It should not be considered, nor does it constitute legal or financial advice. For further information, please see our disclaimer.