Asset Based Loans and Rising Interest Rates

Asset Based Loans and Rising Interest Rates by Jerry Fetta

I have loans against assets that have variable interest rates and today I want to talk about what I do when rates rise.

First, why take a loan against an asset?

Well because for one, when I borrow against an asset, it keeps growing while I use the borrowed funds.

Secondly, when I borrow against an asset, it’s not taxable. If I sold that same asset at a profit, I’d pay taxes on it and I prefer not to do that.

Here is an example of what I mean.

I buy a LOT of gold. I own more gold than you’d probably believe, in fact.

But I also borrow against that gold and use it for making large purchases and investing.

When I borrowed against my gold for the first time, the interest rate on my loan was about 6% per year.

Gold had been growing at about 10% per year.

If I sold my gold, I’d owe taxes on the growth and I’d also have gotten rid of an asset that I want to own long term.

So, I borrowed and invested in several things, one of them being real estate.

Now here is the important thing to realize about borrowing against assets and that is there are actually two different ways to calculate interest and the one most people use can be wildly inaccurate.

#1 Gross interest rate:

On my gold loan, this is 6%. But the question is, 6% of what? The amount of the loan. So, if I borrow $100,000 and never pay it back, I will pay 6% interest, or $6,000.

#2 Effective interest rate:

On my gold loan, the rate is 6%, yes, but that doesn’t necessarily mean I’m paying 6% interest. If I borrow $100,000 and then pay $10k of it back, I’m paying 6% on $90k. So my actual interest dollars paid will be less than $6,000. In this case, the interest on $90k is $5,400. $5,400 divided by the $100k I originally borrowed is 5.4%

Additionally, if I used that loan for an investment, the interest is tax deductible as an investment expense. Let’s say my rate is 25%. This means I can write the 5.4% off on my taxes. Well, that means I’m only actually paying 75% of 5.4% at the end of the year because of my tax write off. 75% of 5.4% is 4.05%.

In this case, my Effective Interest Rate is 4.05%, not 6%.

The lesson here is that the faster I pay my asset backed loans down, the less interest I will pay and the lower my effective interest rate will be.

Additionally, I can deduct interest off on my taxes in some cases, in order to lower the cost of interest even further with the offset of my tax savings.

To learn more about asset based lending strategies, I want to offer you a free copy of my book The Blueprint to Financial Freedom!

Click here to get a copy!

The Blueprint to Financial Freedom by Jerry Fetta

This book comes with great strategies, like what I’ve mentioned in this article, but also a free course supervisor to ensure you understand and finish the book, plus a free coaching call to assist you in implementing it.

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To Purpose, Wealth & Freedom,

Jerry Fetta

Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.

Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.

Learn more at www.WealthDynamX.com

(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)

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Jerry Fetta

Jerry Fetta

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Jerry Fetta is the CEO and Founder of Wealth DynamX. Jerry’s mission in life is to help create millions of financially educated and wealthy families.