With all the popular media harping on the debt problem it is easy to forget that a lot of debt is really helpful; helpful both to the lender and debtor.
Why is debt helpful?
It is a way of transferring the use of something: in this case we most often think of cash but it can be almost anything, from one person to another.
Ever borrow a book? That is debt. You get the use of a book someone else is not using without spending cash on it. You pay off your debt when you give the book back.
Ever rent a car? That is debt. You get the use of a car someone else is not using and they get cash. You pay off the debt when you give the car back with your rental payment.
Ever borrow cash? You get the use of cash someone else is not using. You pay off the debt when you give them back the cash with a rental payment, interest.
So why is it beneficial?
Let us imaging a situation where one person has accumulated some assets, cash, over their lifetime. They no longer want to or are able to work, so they want those assets to generate enough cash for them to live on. They want passive income.
They could just put the cash in the drawer and take out what they need. Or they could loan out that cash, to a bank, or to someone else, and generate additional return.
By loaning the money to someone else they can use the cash to generate passive income, they can also allow someone else, perhaps a younger person who hasn't yet acquired cash of their own, or perhaps a person who has a different opportunity and needs cash to take advantage of it, to borrow the cash to do something useful. Often create active income.
This is a great way for parents and children to help one another.
Parents: be willing to loan your children funds that match the repayment schedule they need, and match the cash needs you have.
Example:
Parent has $50,000 with a need to generate passive income.
Child has a $50,000 home mortgage with the need to pay it off over time.
If the parent uses their cash to become the child's mortgage holder then both sides can win. The parent gets regular monthly payments which is what they need. The child gets to contribute to the family wealth by keeping the interest payments in the family.
Of course if you as a parent haven't taught your child to be responsible then this might not work for you. This also ought to be done with a formal note, perhaps with an attorney, and treated as a business deal not a way for the child to overextend……
Rick
