Why do rich people take more loans?

Last updated on May 19, 2023

A debt doesn’t have to be bad if taken purposefully

The difference between rich and poor is just their outlook of the world and how they see problems. A poor person sees debt as a burden or a tool to afford what he can’t afford otherwise. While a rich person see debt as a tool to make more money. Poor pay interest to banks in form EMIs on their debt while riches earn interest on their debt. And another important thing to note is the richer you are the more debt you can take. Banks don’t really help rich people get richer they just invest in rich people to get a big piece of cake themselves. Now let us try to understand the key differences between good debt and bad debt or shall i call it rich debt and poor debt?

Burden

The biggest difference between good debt and a bad debt is burden. A bad debt multiplies liability over time on you while a good debt decreases liability over you. But, how is that possible? Let’s try to understand by an example. Let’s say there are two person A and B. Person A buys a car on EMI and Person B buys a piece of real estate in the neighbourhood. Both pay an EMI of let’s say 1000$ per month for a loan of 1,00,000$. The only difference being Person B bought a real estate which it rents out for 800$ per month and the value of this property increases every year by 5% i.e. 5000$. Now both pay an EMI of 12,000$ per annum but Person A loses 12,000$ per year and the value of car also depreciates over time while Person B earns 2,600$ every year after paying EMIs on top of that his money is intact. That’s the difference between an asset and a liability.

Opportunity

A wise man once said the difference between rich and poor is just a difference of mindset. And that is very true. The word debt means opportunity for the rich however, for the poor it means affordability. The avg person use debt to pay other debts or expenses that are nearly a liability. However, the rich use debt to finance its business and then take more debt on business assets to expand the business. Rich even take loans for expansion of business or for buying other businesses. When you finance a business with debt your entire expense is tax free. When you buy a business as a corporate on debt you save a lot of money from taxes.

There is much more to explore is the category of how riches use debt as a tool. But, let’s keep this post small I will bring more insight on this topic in further discussions. Subscribe to the newsletter to stay connected.