Help, I m Rich!: Your Compass to a Value-Adding Private Banking Experience

Chapter 7 Loans—Pursuing Burdensome Opportunities

Loans—also called credit—serve in general many purposes (to smooth out consumption over time, take advantage of “cheap” money, set up or expand a business, enjoy tax benefits, convenience, etc.).

Rich people tend to borrow to:

• Leverage
• Speculate
• Acquire property
• Finance life insurance premiums
• Finance single share holdings
• Finance niche assets

Borrowing involves risks:

• Loans magnify losses
• There might be loss of income (which was needed to repay the loan)
• Cost of borrowing might increase

Prior to committing to a loan it is important to familiarize yourself with the credit-related game rules of the institution from which you intend to borrow.

Lending is an important banking function. For every loan there are potentially two alternatives:

1. Don’t take the loan and postpone or abandon the intended transaction.
2. Finance the intended transaction from your own cash reserves.

Taking the loan after having given due consideration to the two alternatives is an investment decision: You expect that in the long run you will be better off by paying interest for the temporary use of money that is not yours. As almost everyone decides at one point in his or her life that the borrowing option is more attractive than the two alternatives, this is an intriguing concept that deserves a closer look.

Even though we consider loans to be part of investments, we have deliberately separated the topics. First, in Part Two on investments we focused ...