In 2020, the average American was more than $90K in debt. Debt can feel like a hole that you can’t climb out of no matter how hard you try. Wouldn’t it be nice if debt built wealth instead? MoneyLion has rounded up some strategies on how to leverage debt to your advantage.
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What qualifies as debt?
Debt is anything that a person borrows, but most often refers to money owed to be paid back at a later date. Debt can come in the form of loans, credit card debt, and overdraft fees, just to name a few. A condition of extending a loan or credit is usually for the borrower to have to pay back the amount borrowed with interest. Here are four common categories of debt.
- Secured debt: Secured debt is backed by something that holds value. This is called collateral. Examples of collateral are homes, cars, and investments. The borrower agrees to pay off the debt or risk losing whatever they put up as collateral.
- Unsecured debt: This is a debt that is uncollateralized. Student loans are an example of unsecured debt.
- Revolving debt: Credit cards are one of the most common forms of revolving debt. Borrowers are offered a line of credit, and when borrowers pay back the amount that they have drawn from the line of credit, the line of credit would replenish. Credit cards often require repayment on a monthly basis.
- Mortgages: Technically a form of secured debt, mortgages are significant enough to be classified separately. A mortgage will be the most significant debt for most people, and the home is its own collateral.
Advantages and disadvantages of debt
People often view debt negatively, and there’s a good reason for that. Poor choices can create a cycle of debt with credit cards and loans. When used appropriately, though, debt can have advantages that help you get ahead.
You may need to take on a loan to accomplish goals that will produce more money in the long run, e.g., obtaining a mortgage to buy a house, which may appreciate in value over time. It’s essential to weigh the risks and consider your options. You can use debt to your advantage.
How does asset leverage work?
It is possible to leverage your assets and debt to build wealth. An individual might need to take out a personal loan to pay off a debt that could range from anything like wedding expenses to car repairs. In any similar situation, the key is to weigh the financial risk involved and decide if it is a good fit for your situation.
6 steps for how to leverage debt to help your financial condition
Here are the steps on how to use debt to your advantage to build wealth.
Build your credit with a loan
Before you start leveraging debt, you need to get your credit score in the right place. MoneyLion can help. We offer Credit Builder Plus to help you build your credit and live your best life. Just sign up for the membership and apply for up to $1,000 at competitive interest rates — without a hard credit inquiry.1 You will receive a portion of your loan proceeds upfront, with the rest deposited into a Credit Reserve Account held in your name, which will partially collateralize your loan until it is fully paid off.2
We will report your repayment activity to the three major credit reporting bureaus once a month to help you establish 12 months of payment history and help boost your credit score. You can easily manage your repayments by signing up for auto-pay.
Try Credit Builder Plus today!
Assess the debt you have and define goals
Next, assess the debt you have before taking on more. Is your debt the type that generates money for you, or is it holding you back? Define your financial goals, and make sure you have a plan to reduce debt that isn’t beneficial.
Chances are, if you have different forms of loans and debt, you’re paying a wide range of interest rates. If you take the time to build credit, then you could qualify for better rates. This is the perfect time to consolidate debt.
See if you can bundle your loans or pay some of them off. Many people continue to pay off credit card bills and student loans without realizing it may be possible to negotiate interest rates if you have better credit.
Let your savings generate income
Instead of letting your savings sit in a checking account, there are a number of options for making your money work harder for you. Consider putting your extra cash in an interest-earning savings account, or, depending on the prevailing interest rate, consider putting your savings into instruments like Certificates of Deposits. You could also take a portion of your money out of your savings to invest. With the MoneyLion Investment account, we can help you with a plan to get closer to your financial goals.
Manage cash flow
Manage your cash flow to maximize your money. Pay off debt that isn’t generating money, like loans and credit card debt. This will free up cash for other purposes, including investing your extra cash to generate more income.
Help build wealth with MoneyLion
Of course, even as you make plans to increase your credit score, you can explore other programs designed to help you build your financial power — like Credit Builder Plus today!
Is leveraging debt a good idea?
It can be if you’re in the right financial situation.
Can leveraging debt help your credit score?
If you’re paying off your debt on time, then it is possible that it can positively affect your credit score. MoneyLion’s Credit Builder Plus can help.
How does leverage affect debt?
When you’re leveraging debt, you will take on more debt.