The most important aspects in borrowing money are the interest and the full cost of obtaining the loan value. The actual goal of the lender is to get the greatest rate return with the lowest cost as much as possible. Lenders need to do this to maximize their profits.
And to secure a loan, assets like house, car, and business are used as collateral. Another popular option is using a credit card or the borrower’s signature. There are also some factors that will determine when you should borrow money from lenders.
First is your Income. Money should really be only borrowed against assets that produce an income. Commercial and investment real estate and other business operations produce income since the asset is used in business to provide a valuable service to another for money. This income can then be used to service the debt owed on the asset. Personal assets such as primary residences, cars, and personal lines of credit do not produce income.
The appreciation. One may borrow money against assets that would, over the long-term, appreciate in value. Even if the income for the use of the asset did not provide enough income to pay off the debt, the eventual sale of the asset would be at a higher value in the future so the debt could be retired upon sale. Commercial and investment real estate have the potential for appreciation as well as businesses as they grow in value through expansion. Consumable assets such as cars, boats, and personal credit lines do not appreciate but decline in value.
The tax benefits. The government will pass laws that allow certain types of indebtedness to have preferential treatment in the tax code. When you borrow money for business purposes, the interest and other costs associated with the loan may be tax-deductible. Since you are receiving a rebate on the taxes you would otherwise owe, your cost to borrow the money is less. This creates an even larger gap between the borrowing cost and the value realized from putting those assets to productive use.
When you are determining whether to borrow or not, you will have the greatest chance of profit if all these factors exist in the borrowing decision. Wise borrowing means to borrow the money at the lowest net cost and generate the greatest value possible with the proceeds. Business applications give the best potential while personal indebtedness has the highest risk of not achieving the desired results.