Imagine you want to buy a small shop to start your business. But you have no money. You take a loan from a bank for the amount of ₹2,00,000. And after a few months, the business starts making good profit. And your profits are ₹4,00,000. The loan was a tool that helped you build wealth during that time. This is how strategic borrowing can help you earn financially.
What Is Strategic Borrowing?
Strategic borrowing means using debt in a smart way. Such as in borrowing for things like real estate, business, or education so one may earn more tomorrow with it. Debt can make your money grow. When you use debt wisely, you can avoid bad debt and focus on good debt that will help you grow wealth.
Good Debt vs. Bad Debt
It is important to mention good debt and bad debt before understanding how debt works in making you rich.
- Good Debt: It refers to borrowing money for things that appreciate in value or help you earn more with time. For example, good debt includes taking a loan to purchase a house or to start a business.
- Bad Debt: This means borrowing for things that do not help you earn more over time. Borrowing money to buy unnecessary clothes or go on vacation can lead you to bad debt. Bad loans in credit cards, personal loans, and microfinance have increased. This happened almost a year after the banking regulator tightened rules for unsecured loans.
Comparing Good and Bad Debt
Let’s take a look at good debt and bad debt in a simple table:
| Type of Debt | Example | Interest Rate | Outcome |
| Good Debt | Home Loan (₹5,00,000 for house) | 8% | Property value rises to ₹7,00,000 in 5 years |
| Bad Debt | Credit Card Loan (₹50,000) | 18% | Pay ₹9,000 extra in interest |
Strategies for Building Wealth Through Debt
Now that we have established what good and bad debt is, let’s get down to how to use debt effectively to build wealth. Strategies include the following:
1. Invest in Real Estate
One of the best ways to use debt is investing in real estate. If you take a home loan, you can buy property. As property values rise, your wealth increases.
For example, if you buy a house for ₹ 50,00,000 with a loan. The value increases to ₹70,00,000 in five years; you make a profit of ₹ 20,00,000. You don’t have to pay for the entire house with your own money. The loan helped you earn this profit.
2. Leverage Business Loans
Commercial business loans can also be another way to use debt. For example, you borrow ₹ 1,00,000 to expand your business. You buy new machinery or hire extra workers. As your business grows, you make ₹ 2,00,000 in profit.
3. Debt Consolidation Loan
If you have multiple high-interest loans, consolidating them into one loan can save you money. Debt consolidation loan allows you to combine all your debts into one loan. This loan comes with a lower interest rate.
For example, if you have ₹ 1,00,000 in high-interest debt at 18% and consolidate it into a loan with 10% interest, you can save ₹ 8,000 a year. You can use this saved money for other investments.
4. Borrow for Education
Taking education loans Top up your wealth acquisition through education loans. Higher education is known to expand one’s income. For example, you borrow ₹2,00,000 to complete a degree. After graduation, you start earning ₹5,00,000 per year.
Conclusion
Debt is not always bad. When used the right way, it can help you build wealth. Focus on good debt like real estate, business loans, education loans, and debt consolidation. Avoid high-interest bad debt. doing this, you can use borrowing to grow your wealth over time.