Start My Answer

5 Tips on How to Use Debt to Build Wealth

Marsha Welch | January 13, 2023

Going into debt can help you build your wealth over time.

Summary: The main difference between good debt and bad debt is how the value of your purchase that puts you into debt changes over time. Consider the difference between a mortgage debt and a credit card debt; one has the potential to generate wealth over time, while the other can cause you to fall even deeper into debt with interest rates and fees. You can use debt to build your wealth when you borrow money to invest, replace inefficient debt with efficient debt, consolidate your debts, use debt to start a business, and use a house flipping strategy.

While some people are wary of debt, others gladly use loans for both major purchases and regular needs without considering the consequences. You may wonder what strategy is better for building wealth, and the right answer is "something in between."

In fact, not all debt leads you to stress and ruins your life. On the contrary, some types of borrowing money can create passive income, help you improve your budget management skills, or even reduce your existing debt. But most people still don't understand how to use debt to build wealth and stay away from both good and bad debt.

If you wonder how debt can create wealth, the answer is on the surface. If you use the money in ways that enable you to build wealth, borrowing money might be beneficial. On the other hand, borrowing money might be detrimental if it leaves you broke and in debt. Below, we describe several debts and how you might use them to your advantage.

Is it possible to use debt to build wealth?

The short answer is yes, it is possible. However, you need to keep in mind that not all debt will improve your financial situation. On the contrary, some debts with high interest rates can trap you and result in various financial difficulties over time.

That being said, you can use other debts for your benefit, for example, purchasing an investment property. These types of debt can help you build wealth by using the income generated from assets to make loan and interest payments and manage the rest of your cash flow to make more investments.

Thus, when you're going to get a personal loan, ask yourself what your borrowing goal is. Of course, it's not always possible to be pragmatic. Sometimes you may get into a financial emergency and need to borrow money to cover your current expenses or regular spending. This way, you won't reach financial success but will be able to cope with financial difficulties without stress.

However, when it comes to building wealth, you need to have a plan or a long-term strategy, estimate all risks, and have a clear understanding of what good and bad debts are.

Understand the difference between good debt and bad debt

There are several factors that determine whether a debt is considered good or bad. Knowing these factors will help you differentiate between good and bad debt. As you probably have guessed, the main distinguishing feature lies in what you're going to spend the money on and how the value of your purchase changes over time.

Besides the way you use your loan funds, there are a few more factors that differentiate good debt from bad debt. The following two metrics are the annual percentage rate and the period of time it will take you to pay off your loan. In addition, your particular debt tolerance and risk tolerance should both be taken into account. But let's take a closer look and give several examples for a better understanding.

Good debt, also known as efficient debt, is a type of obligation you use to make purchases that have the potential to generate long-term wealth for you. This way, you can consider it as a part of your investment strategy. It allows you to put money into appreciable assets and get some benefits from it over time. A home loan is an example of good debt as it allows you to get an asset that will bring you benefits in the end.

A form of obligation with a high cost or a high level of risk is referred to as bad or inefficient debt. Credit card debt is the most prevalent type of bad debt. It is considered so due to its high cost and the way most individuals use their credit cards to make within-credit purchases. Another example of bad debt is a car loan. It is considered bad because you borrow money to purchase a depreciating asset that will only lose value over time.

In summary, good debt is a borrowed amount that you get on reasonable terms and use to build long-term wealth. In its turn, bad debt is a type of borrowing that bears only the debt itself that reduces your wealth because of associated interest and additional charges. Bad debt doesn't come with any profit you can gain with time.

Fight off debt collectors with SoloSuit.

These are the 5 best ways to use debt to build your wealth

You can take a number of actions to manage your personal finances so that you can begin using debt to make money and help you advance your financial goals. Below are the top five ways to build your wealth through debt:

1. Borrow money to invest

Creating passive income streams by using good debt is a strategy that professionals use to build real wealth. There are various investment strategies that can help you with this. You may have even heard of margin investing, leveraged ETFs, hedge funds, and short selling before. Sometimes using debt can help you get several times more annual returns than if you used only your own money.

2. Replace inefficient debt with efficient debt

Use a debt recycling strategy that aims at helping you replace your bad debt with one that generates capital growth or is tax deductible. For example, when you use equity in your house, you can invest in assets that might produce income and potentially grow in value.

3. Consolidate your debts

Debt consolidation can help you reduce your overall interest payments by combining several higher-interest debts into one. When you consolidate your debt, it turns multiple loans into one single loan. This strategy enables you to pay off all of your debt in one large monthly payment, rather than juggling several debts.

The purpose of debt consolidation is to make your debt management easier. If you have one payment, it will be easier to focus on and pay off that debt. Typically debt consolidation allows you to lower the interest rate, reduce your monthly payment, and ultimately pay off your debt quickly.

Check out our guide on debt consolidation and its pros vs cons.

4. Use debt to start your own business

You can use good debt as an auxiliary tool to start a business. If your business becomes successful, it will generate income and create wealth. If you just started your way toward becoming an entrepreneur, it may be difficult for you to qualify for a conventional business loan until you're in business for at least six months. Therefore, a personal loan can help you get started.

5. Consider house flipping

House flippers are people who purchase houses, make all the necessary home improvements, and resell the property for a profit. This way, buying a house can also be considered an investment. You can purchase residential real estate with the help of a loan, fix it, and rapidly flip it for a profit. Although this approach comes with risks, it can help you create wealth if you know what to do.

Final thoughts–How to use debt to get rich?

Obtaining debt can sometimes play into your hands. However, if you want to use debt to get rich, you need to have a plan along with a clear understanding of what type of debt you should use to reach your goals. There is no simple answer on how to use debt to build wealth. It's always a personal choice that is based on your particular situation. However, there are a few options that can lead you to the desired output.

When you decide to use debt to make money, don't forget about cash-flow management. If you're a beginner, seek a financial adviser to choose the right strategy. Also, keep track of your debt-to-income ratio to make sure you don't overburden yourself.

Use SoloSuit to fight off debt collectors

If you find yourself in a position where your debts have become overwhelming and unmanageable, SoloSuit can help.

When debt collectors come knocking, send a Debt Validation Letter to stop them in their tracks. Federal law requires all debt collection agencies to verify a debt within five days of initial contact with a debtor. To validate a debt, they must provide the following information:

  1. The amount of the debt.
  2. The name of the creditor.
  3. The collector will assume the debt is valid unless the consumer sends them a Debt Validation Letter within 30 days.
  4. If you send the collector a Debt Validation Letter they will need to mail you validation of the debt.
  5. If you send them a Debt Validation Letter they will need to mail you the name and address of the original creditor.

If you want to dispute any part of the debt, sending a Debt Validation Letter to the collector forces them to gather the necessary evidence to prove the debt is legit. If they can’t, they must cease communication and leave you alone.

Let’s consider an example.

Example: Robert receives a letter from LVNV Funding, claiming he owes a credit card debt of $5,000. After doing some investigating, Robert believes LVNV is wrong and that the debt was already paid off. Robert uses SoloSuit to draft and send a Debt Validation Letter to the debt collection agency within 30 days of receiving the first letter from them. After some investigating, LVNV Funding realizes that the debt is no longer valid and their records were inaccurate. Robert is off the hook, and LVNV Funding ceases communications with him.

Check out this video to learn more about how a Debt Validation Letter can help you fight of debt collectors:

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

Respond with SoloSuit

Get Started

>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)

How to answer a summons for debt collection in your state

Here's a list of guides for other states.

All 50 states.

Guides on how to beat every debt collector

Being sued by a different debt collector? Were making guides on how to beat each one.

We have answers

Join our community of over 40,000 people.

You can ask your questions on the SoloSuit forum and the community will help you out. Whether you need help now are are just look for support, we're here for you.

Get Started

Win against credit card companies

Is your credit card company suing you? Learn how you can beat each one.

Going to Court for Credit Card Debt — Key Tips

How to Negotiate Credit Card Debts

How to Settle a Credit Card Debt Lawsuit — Ultimate Guide

Get answers to these FAQs

Need more info on statutes of limitations? Read our 50-state guide.

Why do debt collectors block their phone numbers?

How long do debt collectors take to respond to debt validation letters?

What are the biggest debt collector companies in the US?

Is Zombie Debt Still a Problem in 2019?

SoloSuit FAQ

If a car is repossessed, do I still owe the debt?

Is Portfolio Recovery Associates Legit?

Is There a Judgment Against Me Without my Knowledge?

Should I File Bankruptcy Before or After a Judgment?

What is a default judgment?— What do I do?

Summoned to Court for Medical Bills — What Do I Do?

What Happens If Someone Sues You and You Have No Money?

What Happens If You Never Answer Debt Collectors?

What Happens When a Debt Is Sold to a Collection Agency

What is a Stipulated Judgment?

What is the Deadline for a Defendants Answer to Avoid a Default Judgment?

Can a Judgement Creditor Take my Car?

Can I Settle a Debt After Being Served?

Can I Stop Wage Garnishment?

Can You Appeal a Default Judgement?

Do I Need a Debt Collection Defense Attorney?

Do I Need a Payday Loans Lawyer?

Do student loans go away after 7 years? — Student Loan Debt Guide

Am I Responsible for My Spouses Medical Debt?

Should I Marry Someone With Debt?

Can a Debt Collector Leave a Voicemail?

How Does Debt Assignment Work?

What Happens If a Defendant Does Not Pay a Judgment?

How Does Debt Assignment Work?

Can You Serve Someone with a Collections Lawsuit at Their Work?

What Is a Warrant in Debt?

How Many Times Can a Judgment be Renewed in Oklahoma?

Can an Eviction Be Reversed?

Does Debt Consolidation Have Risks?

What Happens If You Avoid Getting Served Court Papers?

Does Student Debt Die With You?

Can Debt Collectors Call You at Work in Texas?

How Much Do You Have to Be in Debt to File for Chapter 7?

What Is the Statute of Limitations on Debt in Washington?

How Long Does a Judgment Last?

Can Private Disability Payments Be Garnished?

Can Debt Collectors Call From Local Numbers?

Does the Fair Credit Reporting Act Work in Florida?

The Truth: Should You Never Pay a Debt Collection Agency?

Should You Communicate with a Debt Collector in Writing or by Telephone?

Do I Need a Debt Negotiator?

What Happens After a Motion for Default Is Filed?

Can a Process Server Leave a Summons Taped to My Door?

Learn More With These Additional Resources:

Need help managing your finances? Check out these resources.

How to Make a Debt Validation Letter - The Ultimate Guide

How to Make a Motion to Compel Arbitration Without an Attorney

How to Stop Wage Garnishment — Everything You Need to Know

How to File an FDCPA Complaint Against Your Debt Collector (Ultimate Guide)

Defending Yourself in Court Against a Debt Collector

Tips on you can to file an FDCPA lawsuit against a debt collection agency

Advice on how to answer a summons for debt collection.

Effective strategies for how to get back on track after a debt lawsuit

New Hampshire Statute of Limitations on Debt

Sample Cease and Desist Letter Against Debt Collectors

The Ultimate Guide to Responding to a Debt Collection Lawsuit in Utah

West Virginia Statute of Limitations on Debt

What debt collectors cannot do — FDCPA explained

Defending Yourself in Court Against Debt Collector

How to Liquidate Debt

Arkansas Statute of Limitations on Debt

Youre Drowning in Debt — Heres How to Swim

Help! Im Being Sued by My Debt Collector

How to Make a Motion to Vacate Judgment

How to Answer Summons for Debt Collection in Vermont

North Dakota Statute of Limitations on Debt

ClearPoint Debt Management Review

Indiana Statute of Limitations on Debt

Oregon Eviction Laws - What They Say

CuraDebt Debt Settlement Review

How to Write a Re-Aging Debt Letter

How to Appear in Court by Phone

How to Use the Doctrine of Unclean Hands

Debt Consolidation in Eugene, Oregon

Summoned to Court for Medical Bills? What to Do Next

How to Make a Debt Settlement Agreement

Received a 3-Day Eviction Notice? Heres What to Do

How to Answer a Lawsuit for Debt Collection

Tips for Leaving the Country With Unpaid Credit Card Debt

Kansas Statute of Limitations on Debt Collection

How to File in Small Claims Court in Iowa

How to File a Civil Answer in Kings County Supreme Court

Roseland Associates Debt Consolidation Review

How to Stop a Garnishment

Debt Eraser Review

Do Debt Collectors Ever Give Up?

Can They Garnish Your Wages for Credit Card Debt?

How Often Do Credit Card Companies Sue for Non-Payment?

How Long Does a Judgement Last?

​​How Long Before a Creditor Can Garnish Wages?

How to Beat a Bill Collector in Court

Not sued yet?

Use our Debt Validation Letter.

Out Debt Validation Letter is the best way to respond to a collection letter. Many debt collectors will simply give up after receiving it.

Let's Do It

It only takes 15 minutes.

And 50% of our customers' cases have been dismissed in the past.

"Finding yourself on the wrong side of the law unexpectedly is kinda scary. I started researching on YouTube and found SoloSuit's channel. The videos were so helpful, easy to understand and encouraging. When I reached out to SoloSuit they were on it. Very professional, impeccably prompt. Thanks for the service!" - Heather

Get Started