Passive Income and Loans: Strategies to Make Money Work for You

Imagine you have €50,000 in your account and you need to make a payment of exactly that amount to buy a car. You have two options: pay it all in cash or apply for financing for the same amount. The first option seems the safest, since it frees us from any future obligations, but at the same time it decapitalizes us and leaves us with no available savings. In contrast, the second option allows us to keep the €50,000 in the account and pay for the vehicle in installments. The secret lies in the return we can obtain from that money.

If the loan has an interest rate of 5% and we get a return of 10%, we not only cover the interest but also offset part of the principal repayment. On the other hand, if the savings do not generate any return, we will be losing purchasing power, even if we gain time by having the liquid capital available.

This is one of the strategies linked to what we call passive income, that is, income generated from invested capital. If the financing strategy works and, with active income (salary), we can cover the installments, at the end of the period we will have paid off the car and still have the €50,000 invested.

The same reasoning applies to early loan repayments. Does it make sense to quickly repay a mortgage with an interest rate of 1.5%? Absolutely not: this capital can be better used in other investments, since the cost of financing is almost zero. Now, is it worth repaying a personal loan with an interest rate of 12%? Without a doubt, because obtaining a higher return on our savings would be much more difficult and risky.

Ultimately, the key is understanding the real cost of money and putting it to work for us.