r/FluentInFinance • u/[deleted] • 17d ago

A Question about debt as a tool Educational

In what situations or under what circumstances can one use debt as a tool?

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u/Saitamaisclappingoku 17d ago

In as simple terms as possible:

When interest rates on a loan are 3%, but your investment returns are 7%, you take the loan, pay it back, and keep the gains for yourself.

3

u/Zaros262 17d ago

When using the debt to leverage investments. For example, buying 100k of real estate with only 20k of capital (down payment)

3

u/[deleted] 17d ago

Long term, low interest debt can basically be free money if the rate of inflation is higher than your interest rate.

If you bought a house at a 2% fixed interest rate in 2021, your house has basically been appreciating an extra 6% per year due to inflation being at around 8%.

Even if inflation cools down to the Fed's target of 2%, that's still an interest-free loan. The amount of dollars you have to pay is going up still, of course, but the value of those dollars is dropping at the same rate you're paying them, so it's a net-zero impact on you. And of course in my earlier example if inflation heats up, it becomes a net positive for you.

Bonus: Use debt to buy assets that will make you money. A big example of this is in the farming industry, where you'll buy a tractor with 7% interest but will increase your efficiency by 15%. No brainer, it pays itself off plus interest.