How to Turn Debt into Profit
With effective debt management, it is possible to build wealth through the use of leverage. Leverage works when you use the cash proceeds from debt to purchase assets that generate income and capital gains. To turn a profit, you must be able to invest the money at greater rates of return than your corresponding interest expenses on the debt. When using leverage, you must learn to appraise how the prevailing interest rate environment affects the strength of the economy.
Other People Are Reading
Instructions
-
-
1
Order a copy of your credit report from TransUnion, Experian, or Equifax. You should verify that the report's information is accurate, prior to applying for more debt. The major credit-reporting agencies provide online resources for you to file disputes.
-
2
Pay down expensive credit card debt to minimal levels, while also building six months worth of your living expenses in cash reserves. Your goal is to improve your future prospects for loan approval on good terms. Lower interest rate on debt better your chances for turning a profit through leverage.
-
-
3
Monitor the federal funds rate as a benchmark, or comparison standard, for debt interest rates. Banks make overnight loans to each other at the federal funds rate--so each individual bank can meet its Federal Reserve requirements. When offering consumer debt, a bank will charge a premium to the federal funds rate, as compensation for the increased risks of dealing with private individuals.
-
4
Anticipate interest rate trends. In recession, the Fed targets a low federal funds rate to encourage people to take out loans, invest money, make purchases and stimulate the economy. Alternatively, the Fed works to drive interest rates higher to shield a growing economy against inflation. You can read "The Wall Street Journal" for commentary on Federal Reserve policy alongside graphs and tables of benchmark interest rates.
-
5
Differentiate between fixed- and variable-rate debt. Fixed-rate debt charges the same interest rate throughout its term. When using leverage, you would take out a fixed-rate loan, if you anticipate higher interest rates in the future. Variable-rate loans, however, feature interest rates that shift with the economic environment. You may consider a variable-rate loan when you expect future interest rates to decline.
-
6
Apply for a loan. As part of the application process, the lender may analyze your credit report, tax returns, banking statements, and investment paperwork, prior to approving credit. After loan approval, you should take note of the loan's maturity date and interest-rate structure.
-
7
Spend the cash proceeds from your loan to acquire productive assets. A business loan can be used to purchase equipment that will add value to your bottom line. Margin debt and mortgages are examples of other types of loans that can be leveraged to purchase stocks and real estate, respectively.
-
8
Direct cash flow from your investments to pay off debt according to interest rates. For example, you may leverage a mortgage to purchase rental property. With the rental income, it would be more economical to pay off expensive credit card debt, than it would be to make extra mortgage payments.
-
1
