Do rich people have loans? Some of you might think that the wealthy are debt-free, but many of them borrow money as well but for different reasons. You need money to make money, and the affluent know this. The more money a person has, the more he can borrow.
Wealthy people seldom borrow money to buy what they want because they almost have everything they need. They take out a loan because they want to enrich themselves further. Surprisingly, contrary to what many people say that debts can make you more miserable, the rich believe that a loan can make them more productive. Here are the top 5 reasons why the rich take a loan.
- Buy assets
Rich people use money that they borrowed to buy assets or things that could generate money. Wealthy people in business may take a loan to finance the construction of his hotel or to purchase real estate, which can earn him more money. Using money that you borrow to go on a cruise or to buy a new car is not the proper way of using borrowed money. While the rich amass a fortune from the amount they borrowed, poor people like us are struggling to make ends meet to pay our loans.
- Start a business
Why work for others when you have a brilliant business plan that can bring in a fortune? Many rich people started small and ended up with huge profits. A lot of finance companies would be happy to extend a loan to someone who can present a comprehensive and sound business plan.
- Borrow to finance a business that would bring in returns more than the cost of the loan
Borrowing money to buy a house, stocks, and other items that you can sell later at a profit is another reason why rich people borrow money. A stock that cost $7 today can be worth ten times or more than the original price. The same is true when you buy land because its value can appreciate as years buy. Wealthy people would never take a loan unless they can make more money out of it.
- Use collateral that they are ready to lose
When choosing a secured loan, rich people would use assets that they can afford to lose without affecting their lives. They would never mortgage their house because they know that losing it can make their family homeless. If they have several properties, they will use one as collateral. When you own several residential units for rent, you can use one to secure your loan. If you default and the lender seizes your property, you still have several groups left.
- Spend their money on more profitable ventures
Believe it or not, rich people take home loans just like you. However, they buy houses that are worth several million. But why take a home loan when they can pay in cash? The interest for a house loan that is payable in 15 years has an interest of 3.4% per year. If they invest the amount they should have paid for a house, they will earn a lot more than the annual percentage interest of their loan.
Another expense that the rich seldom pay in cash is their taxes. Instead, they would take credit cards that offer 0% interest in the first year of use. They pay their taxes using the credit card without paying charges while the money they should have spent on fees is earning more money in the bank or as an investment.
Funding for education
Why pay cash for a university degree of your child when you can get a student loan to finance his education? Rich people have high credit scores, which qualifies them for a low-interest loan. You can invest the money in other profitable business ventures. If your child lands a high-paying job after graduation, you will get a high return of investment.
Making opportunistic investment
A friend relocating to another state wants to sell his house quickly at a low price. Someone rich would grab this opportunity to invest in something he can sell later at a high price. However, he would not use cash to pay. Instead, he would get a loan that has a low interest. The deal could earn him a significant profit.
Expand a business
Putting up several branches for your business can cost tons of money. People in the business industry would instead take a loan to finance it rather than pay in cash. Because they have money, banks are willing to lend more. If they need a million, they can borrow that amount at a low-interest rate while their money is earning huge profits.
It is wrong to think that the rich do not have debts. They probably owe much more than you do. But because they invest the money they borrowed instead of spending them on things that cannot make money, their debts make them more productive.