Loans, used wisely, amplify financial growth — they are leverage. Buy a $1,500,000 house with $300,000 down at 5% annual appreciation, and the equity gains $75,000 in a year: a 25% gross return on equity. That number is the headline, not the answer. It ignores debt service. A $1,200,000 mortgage at a 6%–7% rate costs $72,000–$84,000 in interest alone per year, which by itself erases the gross gain in most years; property taxes, insurance, and maintenance push the net lower still. Leverage magnifies returns on the equity side and costs on the debt side — the net is what compounds. Revolving credit at 20%+ APR has none of the upside and all of the carry; it is wealth destruction with extra steps.
Understanding your financial flexibility is crucial when considering a loan. It’s about knowing what loans you can afford, as lenders will assess this too. Debt can build wealth by letting you leverage investments for higher returns. Yet, it’s a double-edged sword; excessive debt can weigh you down, slow your financial progress, and make you more vulnerable during economic downturns. Always weigh the potential benefits against the risks before taking on debt.