Chapter 16
Loans

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 complete 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.

Your financial flexibility sets the ceiling on what you can borrow. Know what you can carry before you apply, because the lender will run the same numbers. Debt can build wealth by letting you leverage investments for higher returns. The same leverage cuts the other way: excessive debt slows your financial progress and makes you more vulnerable in downturns. Weigh the benefits against the risks before taking it on.