What do rich people borrow money for?

fool.com - Rich People Follow These 3 Borrowing Rules. Do You?

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Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. Want to borrow like a rich person? You can follow these rules too. If you have a lot of money, you probably don't need credit for anything since you could pay cash for houses, cars, and other purchases. But rich people do borrow frequently, taking out loans such as mortgages and using credit cards. The difference is, most wealthy people follow a few simple rules when borrowing to help them ensure their loans improve their financial position -- rather than leaving them worse off while enriching their creditors. The good news is that anyone can follow these rules -- even if they aren't rich. Here are three guidelines you should consider adopting as your own.

1. Use debt as leverage to grow wealth

When rich people borrow, they do so because they want to improve their overall financial situation, and they can do that by leveraging the money lenders provide. You can do the same. For example, a wealthy person might take out a loan to buy an investment property that produces consistent income and goes up in price. This can increase their net worth as the value of their asset grows. Or they might use a margin loan to invest more money in the stock market so they can try to earn a higher return. Wealthy people may also decide to borrow because it lets them make better use of their resources. For example, it's common for rich people to take out mortgages. That's because interest rates are low and interest is tax deductible. Rather than tying up their cash in a house, they can get a low-interest loan and invest their own dollars in assets that produce a better return.

2. Avoid borrowing for consumption

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Generally, rich people don't borrow to buy consumer goods that they can't afford. For example, they wouldn't charge groceries on their credit card and not pay off the balance, nor would they take out loans to fund an expensive vacation or to buy fancy clothes or jewelry. Rich people do use credit cards often though, so they can earn rewards -- but they pay the balance off in full so they don't pay interest. By living on a budget and avoiding taking on debt for assets that don't increase in value, you can also borrow like a rich person.

3. Steer clear of predatory lenders

Finally, rich people avoid high-interest loans with predatory terms such as extreme fees and very short repayment timelines. This includes car title loans and payday loans. That said, it's easier to avoid this type of borrowing when you are wealthy and have good credit -- and when lenders compete for your business. But it's a good idea to try to minimize this type of debt even if you're struggling financially. If you don't have perfect credit, for example, consider a government-backed mortgage instead of a subprime home loan and look into a payday loan alternative from a credit union rather than a payday or car title loan. It's definitely harder for the average person to follow these rules -- but if you can swing it, you might increase the chances of making a little more money of your own. Then you can make lenders work for your business -- and have the confidence of knowing you won't have to borrow unless you're doing so for a strategic reason to improve your financial situation.

fool.com - Rich People Follow These 3 Borrowing Rules. Do You?

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