How To Make Money With Debt (2022)

The idea that debt can make you money is popular in online finance circles. The logic goes like this: if you borrow at one rate and the thing you buy earns or grows at a higher rate, you keep the difference. Businesses and property investors use this principle all the time. What the slogan usually leaves out is how quickly the same arithmetic works against you when things go wrong.

Leverage in plain terms

Leverage means using borrowed money to control a larger asset than you could buy with your own funds. If the asset rises in value, your return on the money you put in is magnified. If it falls, losses are magnified in exactly the same way, and the loan still has to be repaid in full, with interest. Borrowers can end up owing more than the asset is worth.

When borrowing can be productive

Some debt is widely seen as more constructive than others, though none of it is risk-free:

• A mortgage on a home you can comfortably afford, where the alternative is paying rent.
• Education or training that has a clear link to better earning prospects, at a manageable cost.
• Business borrowing for equipment or stock with a tested plan for generating revenue.

Even in these cases, the outcome depends on interest rates, job security, the specific asset and plenty of factors no one controls.

Debt that rarely pays off

Expensive card balances, short-term payday borrowing and instalment plans used for everyday spending tend to drain wealth rather than build it. Borrowing to buy shares, cryptocurrency or other volatile assets is especially risky: a sharp fall can wipe out your own money and leave the loan intact. Some lenders can also demand repayment or sell assets if values drop, locking in losses at the worst moment.

Questions to ask before borrowing

Repairing a difficult debt situation

For many people, the more pressing question is not how to profit from debt but how to get out of it. Listing every balance, rate and minimum payment is a useful first step. Many countries have free, independent debt charities and advice lines that assist with budgeting and negotiating with creditors. Be cautious with companies that promise to make debt disappear for an upfront fee, and check that any firm is properly authorised before sharing personal details.

Borrowing can be a useful tool, but it is never free money, and leverage amplifies mistakes as readily as successes. Anyone considering borrowing to invest or to start a venture should talk it through with an independent, qualified financial adviser first, and should only take on repayments they could manage in a bad year as well as a good one.