Debt is a staple in American economics, with millions of consumers using borrowed funds from traditional and unconventional lenders to pay for what it is they need. Credit card, personal and home equity lines of credit, and personal loans are often the focus of the consumer debt discussion, as these represent the most widely used forms of debt in today’s market. Most individuals are comfortable with taking on some degree of debt, especially when a financial emergency arises. However, there are various methods debt can be used to improve one’s financial position, above and beyond taking care of unexpected bills. Here’s how leveraging loans works, and how the strategy may be beneficial for you.
What is Leveraging?
There is no exact definition of a leveraged loan, but most agree that the term embodies the process of a lender providing access to borrowed funds when an individual or business is already saddled with debt. Leveraged loans are riskier to the lender and therefore carry a higher cost than a loan that is less likely to go into default. But leveraged loans are made available to certain borrowers who can show a strong track record of repayment on what they owe, and in some cases, a need for the newly borrowed funds. Leveraging loans is most common in business, but individuals can use this tool to their benefit in certain scenarios.
Keeping Cash on Hand
One of the ways individuals can use loans when they already have some outstanding debt is to finance major purchases or expenses. Using an unsecured personal loan, offered through a bank or online lender, or a collateralized loan, like one offered by TNL Car Title Loans, allows you to keep savings or investments untouched. Taking out a loan allows one to use the lender’s assets to spread out payment for a big-ticket item or an unexpected bill over the course of a few months or a few years. It is important to note that leveraging in this sense carries with it the added cost of interest on top of the funds borrowed. Be sure to evaluate the interest cost before signing on the dotted line.
Consolidating Other Debts
Millions of people each year use leveraging to consolidate other debts, most often when those obligations carry high interest rates. Credit cards, for example, carry an average interest rate of just over 15%, but some card interest rates may reach upwards of 25%. If a single loan can be secured for an interest rate lower than the aggregate interest rate on debts already in play, the borrower has an opportunity to reduce the interest cost and simultaneously lower the payment due each month. Consolidating debts with a leveraged loan may also be beneficial when the borrower simply wants to reduce the number of debt payments made each month.
Businesses use leveraged loans frequently for the purpose of investing, and individuals have the opportunity to do the same. Using borrowed funds to invest in something that has the potential to earn far more than the interest owed on the loan can be a smart way to improve one’s financial position. However, investing carries a great deal of risk, especially when the potential for a return on that investment is high. Individuals considering investing with borrowed funds through a leveraged loan should seriously consider the consequences of the investment performing poorly before making any moves.
Leveraged loans are more common than most people think, and when used correctly, they can be a powerful tool. Borrowers should take the time to understand both the advantages and disadvantages of using leveraged funds when it comes to keeping cash on hand, consolidating debt, and investing. Only when the benefits outweigh the drawbacks does it make sense for someone to get a loan for the purpose of leveraging.
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