Posts Tagged ‘leverage’

Why can it be good to borrow money?

Friday, October 23rd, 2009

It’s a good question: loans come with interest, so you always have to pay back more than you borrowed. How is borrowing possibly a good idea?

Say you want to buy a house. Houses aren’t cheap, but they’re generally necessary (unless you want to live in your car). Especially if you’re fairly young and just starting out, chances are you probably can’t afford to just drop the full value of that house, in cash, up front, into the seller’s lap. But if you take out a mortgage to pay for the house, you can pay it back a little at a time. True, you’ll end up paying back more over time than if you’d just paid up front, but presumably you’ll be making more money as your life progresses, and then mortgage payments will count for less of your budget.

Leverage is…

Friday, August 21st, 2009

Leverage is an investment technique in which you use a small amount of your own money, and borrow the rest to make an investment of much larger value. In that way, leverage gives you significant financial power. If you borrow 90% of the cost of a home, you are using leverage to buy a much more expensive property than you could have afforded by paying with your own cash.

A Leveraged Buyout is…

Sunday, August 2nd, 2009

A leveraged buyout is the purchase of a controlling share of a company by using borrowed money. In other words, a leveraged buyout is when one company takes over another company and instead of paying for it in cash or equity, the purchased is paid for with debt (bonds or borrowed cash).