Why Millionaires Take Personal Loans: Secrets of the Wealthy

Imagine a successful entrepreneur in Mumbai who owns multiple businesses and properties yet chooses to take a personal loan for a new venture. 

It might seem surprising, but many wealthy individuals in India opt for personal loans despite their assets. In fact, banks' personal loan portfolios have grown significantly, reaching nearly ₹55.3 lakh crore, accounting for a third of total bank credit.

This trend raises an intriguing question: Why do millionaires, who seemingly have huge funds, choose to borrow money? The answer lies in financial planning. Using personal loans, the affluent can maintain liquidity, take advantage of investment opportunities, and benefit from tax advantages.

This approach allows them to use their existing wealth more effectively, ensuring their assets continue growing while they pursue new ventures.

Understanding these financial strategies offers valuable insights into how the wealthy manage and multiply their resources.

Preserving Liquidity for Bigger Opportunities

Imagine a businessman in Delhi who owns multiple properties and a successful export company. He has crores in assets, yet he chooses to take a ₹20 lakh personal loan instead of using his own money. 

Sounds strange? Not really. Wealthy people borrow money to keep their cash free for more immense opportunities.

Rich people know that keeping cash in hand is essential. Suppose a business owner has ₹50 lakh in savings. Instead of using this money to buy property, he takes a home loan of ₹75 lakh. This way, he still has ₹50 lakh available for emergencies or investments.

Many investors follow the same method. They take loans instead of using their savings. They do this to invest in stocks, businesses, or real estate when a good deal comes up. This strategy helps them grow their wealth without losing liquidity.

Using Low-Interest Rates

Loans in India have different interest rates. Wealthy individuals use this to their advantage. They borrow at low interest rates and invest in high-return opportunities.

For example, home loans in India offer annual interest rates of 8% to 9%. However, an investor might find a business opportunity that gives 15% returns. Instead of using his own ₹1 crore, he takes a home loan at 8% and invests his money in a high-return business. This way, he makes more profit.

Below is a comparison of different loans and their interest rates:

When borrowing at lower rates, wealthy people ensure their investments earn more than their loan cost. This helps them grow their money faster.

Avoiding Capital Gains Tax

Another reason the rich take loans is to avoid paying high taxes. When someone sells property or stocks, they pay capital gains tax. However, they can avoid this tax by taking out loans instead of selling assets.

For example, a wealthy investor owns stocks worth ₹1 crore. If he sells them, he may have to pay 10% long-term capital gains tax, which is ₹10 lakh. Instead of selling, he takes a loan of ₹50 lakh at 10% interest. Now, he can use this money without paying ₹10 lakh in tax.

Business owners also do this. Suppose a person owns a property worth ₹2 crore. He does not sell it. Instead, he takes a ₹1 crore loan using the property as collateral. This way, he keeps his assets and still gets money for new investments.

Real Estate and Asset Expansion

Many wealthy individuals use loans to expand their real estate and asset portfolios. Instead of paying upfront, they borrow to buy properties and assets, allowing them to keep their cash reserves intact.

For example, a businessman in Bangalore has ₹1 crore in savings. Instead of using this amount to buy a commercial property, he takes a home loan of ₹75 lakh at 8.5% interest. He still has ₹1 crore in liquid funds and an appreciating asset.

Below is a comparison of real estate loan types:

This method allows investors to build a strong real estate portfolio without exhausting their funds. Property values generally appreciate over time, giving them high returns on minimal upfront investment.

Funding Business Ventures Without Tapping Savings

Starting or expanding a business requires significant capital. Many successful entrepreneurs take loans instead of using their savings, ensuring they have enough funds for emergencies or future opportunities.

For instance, a businessman with a company turnover of ₹1.5 crore wants to open a second outlet. Instead of spending ₹20 lakh from his savings, he takes a business loan at 12% interest. This way, he keeps his ₹20 lakh for other investments and grows his business simultaneously.

Below is a comparison of business loan types:

By taking a business loan, entrepreneurs avoid financial strain and ensure smooth operations while keeping their cash reserves for other investments.

Increasing Creditworthiness for Future Deals

Building a strong credit profile is crucial for securing larger loans in the future. Wealthy individuals take smaller loans and repay them on time to improve their credit scores. This helps them qualify for better loan terms when they need more considerable financing in the future.

For example, an investor planning to buy a ₹5 crore commercial property may first take a ₹10 lakh personal loan and repay it on time. This improves his creditworthiness, making securing a higher loan amount at lower interest rates easier.

Timely loan repayments show banks that borrowers are responsible, leading to quicker loan approvals and better terms. This strategy helps high-net-worth individuals plan for long-term financial growth while maintaining easy access to funds.

Using Loans as a Hedge Against Inflation

Inflation reduces the value of money over time. Wealthy people take loans as a hedge against inflation, meaning they borrow cash today and repay it later when its real value decreases.

For example, suppose a businessman borrows ₹50 lakh at 9% interest for five years. Over this period, inflation averages 6% per year. This means that by the time he repays the loan, the actual value of the amount he repays is lower than when he borrowed it. 

He benefits from inflation while using the loan to grow his business or investments.

Seizing Time-Sensitive Investment Opportunities

Sometimes, high-investment opportunities arise unexpectedly. Wealthy individuals take loans to seize such opportunities without having to wait and gather funds.

For instance, a real estate investor finds a prime property worth ₹1 crore at a discounted price, but the deal requires quick payment. Instead of liquidating his assets, which may take time, he takes a short-term loan of ₹50 lakh at 10% interest and secures the deal. 

Later, he sells the property at a higher price, making a significant profit.

Diversifying Income Streams

Wealthy people do not rely on a single source of income. They take loans to invest in different sectors and build multiple income streams. This ensures financial stability even if one source underperforms.

For example, an entrepreneur running a successful manufacturing business takes a ₹20 lakh business loan to invest in a restaurant. If one business slows down, the other continues generating revenue, reducing financial risks.

Below is a comparison of income sources through loans:

By diversifying investments through loans, the wealthy ensure a steady flow of income from multiple sources while reducing financial risks.

Choose the Right Loan for Your Needs

Each loan type serves a different purpose. Picking the right loan helps save money and protects assets.

• Personal Loan (PL): Good for urgent needs, medical expenses, or home renovation. Loan amount: ₹10 lakh to ₹20 lakh.
  
  
• Debt Consolidation Personal Loan (DC PL): This loan consolidates multiple loans into one, reducing overall interest. The loan amount ₹15 lakh to ₹30 lakh.
  
  
• Overdraft (OD): Helps in managing cash flow. Only pay interest on the amount used—₹10 lakh to ₹20 lakh.
  
  
• Business Loan (BL): For business expansion, working capital, or buying equipment. Loan amount: ₹10 lakh to ₹20 lakh.
  
  
• Home Loan (HL): Ideal for buying property. Loan amount: ₹50 lakh to ₹1 crore.

Ravi took a Debt Consolidation Personal Loan of ₹20 lakh to clear three high-interest credit card debts. Now, he pays a single EMI at a lower rate, reducing his financial burden.

Match Loan with Income for Better Repayment

Lenders check income before approving loans. Taking a loan that suits your income ensures smooth repayment and financial security.

Priya earns ₹1 lakh per month and wants to buy a house. She takes a home loan of ₹75 lakh because she can comfortably pay the EMIs while managing other expenses.

Use Overdraft for Emergency Cash Needs

An overdraft is a flexible loan that allows you to withdraw money as needed. Interest is charged only on the used amount.

Sunil runs a small business. One month, he needed extra cash to pay suppliers. He used ₹5 lakh from his ₹15 lakh overdraft limit. Instead of paying interest on ₹15 lakh, he only paid interest on ₹5 lakh, reducing his cost.

Consolidate Loans to Reduce Interest

Debt consolidation helps in managing multiple loans under one account. This reduces stress and high-interest payments.

Example:

• Ramesh had three loans:
  • Credit Card Loan at 36% interest
  • Personal Loan at 18% interest
  • Gold Loan at 14% interest
• He took a Debt Consolidation Personal Loan at 12% interest to pay them off.
• Now, he pays a lower EMI, saving thousands every month.

Conclusion 

Wealthy people take loans not because they need money but because they want to use their money wisely. They preserve liquidity for bigger opportunities, borrow at low interest rates, and avoid paying unnecessary taxes. 

These smart financial moves help them stay rich and grow their wealth even more. By understanding these strategies, anyone can learn how to manage money better and make smarter financial decisions.

FAQs

1. Why do rich people take loans if they have money?
   They take loans to keep their cash available for bigger investments and emergencies.
   
   
2. How do the wealthy benefit from low-interest loans?
   They borrow at low-interest rates and invest in high-return opportunities to make more profit.
   
   
3. How do loans help avoid high taxes?
   Instead of selling assets and paying capital gains tax, they take loans against assets to get money without tax.
   
   

4. Why do successful business owners take loans instead of using savings?
   They use loans to expand their business while keeping their savings for future opportunities.
    

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?