Video game industry

an introduction to loans and leverage – The Ticker

In the previous issue of Credit Fundamentals, we firm releases mini-series on credit cards. We will now move on to the two “L” words – loans and leverage.

Both individual consumers and large entities can use loans to leverage other people’s money to achieve their financial goals. I will introduce each loan, along with an example of how it would be used by a regular consumer versus a business-savvy consumer.

1. Car loans

People love cars, but not everyone has the money for a cash transaction. This is where the car loan comes in.

If a person is wise, he will arrive at the dealership with financing for a loan plan from the bank. If the person doesn’t, the dealership will create multiple inquiries on your credit file looking for offers.

Take two different people for example.

Person A receives a car loan of $25,000 at an excellent interest rate of 2.5%. With 8.875% tax and other fees – usually calculated at $500 – that person will pay $547.85 per month. With $4,015.59 calculated in interest, Person A will end up paying $29,015.59 in total for his car.

Person B receives a car loan with the exact same terms, but rents it out on Turo, an app where you can rent your own cars. Person B can rent their car for 20 days for $50 per day. They’ll earn $1,000 in gross income by the end of the month, but after Turo’s fees and taxes, which are calculated at 24%, they’ll be left with $760 by the end of the month.

If you look at these two examples, Person A pays $547.85 per month, while Person B earns $212.15 per month. Person B wouldn’t have their car available for 20 days a month, but this shows how loans can be used to leverage assets and gain potential.

2. Home loans

A good example of home loans would be the retail units of Airbnb Inc.

Person A takes out a 30-year mortgage for a $250,000 house with 7% interest. With property taxes and home insurance taken into account, their monthly payment would be $1,894. This factors in $348,992 in interest over 30 years, so the total cost of the loan would be $598,992.

Person B takes out a 30-year mortgage for five rental units at $50,000 each for a total of $250,000 with 7% interest. With property taxes and home insurance taken into account, this person would pay about $431 per month for each rental unit, or $2,155 in total for all five.

Let’s say the landlord makes $2,000 rent on each rental unit for the month. It’s $10,000 before tax. To keep this explanation simple, I will refer to the 24% tax figure in the auto loan example.

The owner of the rental unit will realize $7,600 in net profit after taxes. Their mortgage on all the houses will only be $2,155, so they will make a profit of $5,445 each month.

You can use the extra profit to increase or even buy your dream home for personal use. This example doesn’t consider miscellaneous expenses, but it’s a great example of how you can use other people’s money and leverage loans to generate cash flow.

The next issue will look more at big business and debt.