Borrowing Costs and Leveraged Returns

A loan changes three things at once: the cash you can spend, the assets you own, and the payments waiting for you in the future. To judge whether borrowing is worth it, you need all three accounts: net worth, investment outcome, and your ability to meet each repayment on schedule.

What a Loan Does to Your Books

Using Chinese yuan for the examples, when a bank lends you 100,000, two entries appear together. Your deposit account rises by 100,000, and your debt rises by 100,000. Absent fees or any other change, your net worth is exactly where it started. The bank has its own limits to respect, capital requirements, settlement liquidity, credit judgement, but your picture stays symmetric: equal credit, equal debt.

Use the loan to buy an asset and your net worth equals the asset's current value minus the principal still owed. Interest and fees come out of other money. For how those accounts are separated, see money, income, and wealth.

What Leverage Magnifies

Take a teaching setup. You put in 300,000 of your own money and borrow 700,000, then buy an asset worth 1,000,000. One year later you sell. The loan is fixed at 4% per year, with principal and interest due in a single lump sum at year end. No fees, no taxes, and no dividends or rent along the way.

Sale price at year end	Principal + interest repaid	Left to the owner	Return on your 300,000
1,100,000	728,000	372,000	24%
1,000,000	728,000	272,000	−9.33%
900,000	728,000	172,000	−42.67%

Under this one-shot repayment setup, the return on your own money is:

(End value + cash received during the year − principal repaid − interest paid − fees − your initial own money) ÷ initial own money.

Now buy the same 1,000,000 asset outright. You need the full 1,000,000 from your own pocket, and the returns on that capital at the same three sale prices are 10%, 0%, and −10%. Same asset, same price moves, different denominators. A 100,000 asset gain leaves 72,000 after interest, or 24% of the 300,000 invested. A 100,000 asset loss plus 28,000 interest reduces that same stake by 128,000, or about 42.67%.

One fairness check before you compare households. The cash-buying family ties up 1,000,000; the borrowing family ties up only 300,000 and still holds 700,000 elsewhere. To compare two families starting with identical total wealth, include the retained 700,000, its intended use, and its outcome in the comparison.

Inflation and the Weight of Repayment

Fixed future payments can be measured in today's purchasing power. Suppose you owe 100,000 and must repay 104,000 a year later, while prices rise 3%. That 104,000 buys what 104,000 ÷ 1.03 ≈ 100,971 buys today. Against 100,000 borrowed, the inflation-adjusted interest rate is about 0.97%. If inflation exceeds the nominal borrowing rate in this setup, the real interest rate measured with that price index is negative.

Whether the payment is affordable is a separate question. It comes down to income minus living costs in the period. If prices climb and your wages stay flat, the gap shrinks. Record wage growth and price growth as separate lines.

A fixed rate holds at the contracted level. A floating rate reprices according to the agreed reference index, margin, and review dates. Whether your monthly instalment shifts also depends on the repayment method, so plan cash around the actual schedule in your contract.

Borrowed Money versus Money You Keep

Compare within the same holding period: the loan principal, interest at each payment date, fees, and remaining debt, alongside what the money you kept earns before you need it. A long loan stacks interest across many years, so line up all payments and all uses of funds on one shared timeline before deciding.

Set aside what living and repayment require first, then look at how far the asset can move and how long selling it will take. Coverage and reserves: income concentration and cash reserves. How real returns line up against the price index: price measures and household purchasing power.