January 31, 2025

How Leveraging Debt Can Help You Reach Your Goals

How Leveraging Debt Can Help You Reach With Goals@1.5x

Student loans, mortgages, car payments — sometimes, it feels like debt is just a drain on your finances. But what if there was a way to make your debt work for you?

That’s exactly what happens when you leverage your debt. Leveraging debt means you’re borrowing money to build your wealth. Instead of waiting to save enough, you use a loan to make an investment and give yourself a chance to earn even more. It might sound counterintuitive, but it has the potential to transform your financial health.

In this article, you'll discover how to leverage debt, the financial risks, and how to manage your debt to build wealth.

Understanding debt

Debt is money you borrow to pay back later, usually with extra fees called interest. Let's take a look at some common types of debt:

Secured debt. In these loans, you secure the amount with some type of collateral, like a car, home, or valuable item. Banks usually charge lower interest rates on these loans, because if you can't pay, they can take the item you put up as a backup and sell it to settle the debt.
Mortgages. A mortgage is a type of secured loan that helps you buy property. If you can’t make your mortgage payments, the bank can take your home and sell it in a process called foreclosing, using the money from the sale to cover the amount you owe them.
Non-revolving debt. In these loans, you borrow a lump sum of money once and pay it back with regular payments over time. Common examples include car loans or personal loans. These loans have usually payment schedules and fixed interest rates, so you know how much you owe each month until you settle the debt.
Revolving debt. Revolving debt is open-ended, and you can use it repeatedly. A credit card is a good example. You likely have a limit that you can borrow up to, and once it’s paid back, you have access to the credit again.

Understanding leverage

Leverage is a financial strategy that helps people, businesses, and investors increase their investment opportunities by borrowing money to buy more assets than they could with their savings alone. The aim is to earn more money than the amount borrowed, whether that comes from increased property value, additional rental income, business growth, or investment returns.

Here are some examples of how to use debt to build wealth:

A small business might take out a loan to buy advanced equipment that increases productivity, generating more revenue than the loan's cost.
An investor borrows funds to buy stocks during a promising market period, potentially earning returns exceeding the interest paid.
An individual uses a mortgage to buy a home, build equity, and benefit from the property's increasing value while living in the house.

Although this is one way to maximize your earnings, leveraging debt doesn’t guarantee wealth. Your success depends on your ability to generate returns that consistently exceed the cost of borrowing, making this a risky method. It’s important to have a solid strategy to manage financial risks and a good understanding of the financial markets.

Advantages of financial leverage

Despite the risks, leveraging debt has the potential to improve your financial health. Here are some potential advantages you might experience:

Amplify returns

Leveraging debt allows you to invest more money than you currently have to earn a profit. The more you have invested, the more interest you can earn.

Investors calculate returns based on the total investment amount, including any borrowed funds, rather than just the personal contribution. This approach lets you seize opportunities immediately instead of waiting years to save.

Access opportunities in investing

Financial leverage helps you take advantage of investment opportunities you couldn't afford alone. Combining borrowed money with your funds allows you to access more significant investments or opportunities, like taking out a mortgage for a bigger house or a rental property. This approach can help you grow your portfolio faster and act on time-sensitive changes, giving you a competitive edge.

Meet short-term financing needs

Leverage can offer businesses faster access to extra funds, making it an option to purchase inventory or take advantage of opportunities.

Disadvantages of financial leverage

As we mentioned, there are risks involved with this method. Here are some of the drawbacks of leveraging debt:

Increasing debt

The main risk of using leverage is that it increases your debt. When you borrow money to invest, you take on a new financial responsibility.

This can be a problem because if your investments don't perform well, since you still have to repay the borrowed money. Not making the payments can affect your financial situation, potentially draining your savings and harming your credit score.

Be careful not to take on more debt than you can handle.

Expensive

If things go well, borrowing money can boost your return, but you must consider the interest cost.

If you borrow $5,000 at a 10% interest rate to invest with your own $5,000, and your investment earns a 15% return, you would make a profit of $1,500. But you’d pay $500 in interest on the borrowed money, meaning your profit would be $1,000. Once you pay the loan back, you might not actually earn that much. Make sure to keep interest rates in mind when considering borrowing options.

High risk

Borrowing money to invest can be risky. If your investments lose value, you could lose more than you initially invested and become overleveraged — which is when your debt becomes too much to manage. Debt can quickly turn from a potential growth opportunity into a financial burden, threatening your financial stability.

Tips to leverage debt smartly

Leveraging debt can be a powerful strategy for building wealth, but make sure you approach it thoughtfully. Here's how to turn debt from a potential risk into a strategic financial tool.

1. Build your credit

Strong credit offers lower interest rates and better loan terms. Focus on making on-time payments to improve your credit score. When you have a higher credit score, you’ll likely qualify for better interest costs in the future, ultimately reducing the cost of borrowing.

2. Assess your ability to repay debts

Create a solid repayment plan before taking on new debt. Review your current income, expenses, and any potential changes in your financial situation to ensure that debt payments will be manageable — even if your investments don’t pay off as expected.

3. Evaluate your risk tolerance

Leveraging debt involves risk, so it's essential to understand how much you're comfortable taking on. If you prefer steady, predictable returns, consider lower-risk investments. But if you're willing to take on more risk, you might choose investments with the potential for higher returns.

4. Aim for low interest rates

The lower your interest rate, the easier it is to make debt work in your favor. Shop around and compare rates before committing to a loan, and look for options with fixed rates to avoid unexpected increases.

5. Take advantage of tax deductions

Some debts, like mortgages and business loans, come with tax benefits. Understand the deductions you qualify for, as they can lower your borrowing costs and increase your gains.

6. Use debt strategically for asset-building

Focus on using debt to acquire assets that appreciate, like real estate or investments, rather than using it for short-term spending. This approach helps your debt work toward building long-term wealth.

7. Create an emergency fund

Debt can be more manageable if you have a financial safety net. An emergency fund allows you to cover unexpected expenses without relying on credit, helping you stay on track with debt payments. If you can, take the time to save for emergencies before taking on additional debt.

Take charge of your finances with Earnin

Leveraging debt doesn't have to be scary. It's a tool that, if used wisely, can unlock new opportunities and help you reach your financial goals faster.

Let EarnIn help you on your journey. With EarnIn’s Cash Out feature, you can access your earnings as you work — up to $150/day with a max of $750 between paydays — to make smart financial choices and stay on top of life’s demands without adding on debt.¹

Plus, EarnIn’s free Credit Monitoring tool² lets you keep an eye on your score as you build it over time by making on-time payments.

Download the EarnIn app today and make moves toward your financial goals.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

Your Pay Period Max is the maximum amount you can access between paychecks, typically ranging from $50 to $1,000, and your Daily Max is the maximum amount you can access in a single day, up to $150. Your specific Daily Max and Pay Period Max are determined by EarnIn based on your income and financial risk factors, as explained in the Cash Out Maxes section of our Cash Out User Agreement. These limits may vary and are subject to change at EarnIn’s discretion. Your actual Daily Max will be displayed in your account before each Cash Out.

EarnIn does not charge interest on Cash Outs or mandatory fees for standard transfers, which usually take 1–2 business days. For faster transfers, you can choose the Lightning Speed option and pay a fee to receive funds within 30 minutes. Lightning Speed is not available in all states. Restrictions and terms apply; see the Lightning Speed Fee Table and Cash Out User Agreement for details and eligibility requirements. Tips are optional and do not affect the quality or availability of services.

Calculated on the VantageScore® 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don’t be surprised if your lender uses a score that’s different from your VantageScore 3.0. Learn more.