Productive Debt

Productive debt is money borrowed to pay for something that is expected to produce income or increase wealth by more than the cost of borrowing. Typical examples are a business loan for equipment that raises output, a mortgage on a rental property whose rent covers the payments, or funding for education that increases future earnings. It is usually contrasted with consumption debt, such as credit card balances for holidays or everyday spending, which leaves nothing that pays the loan back. The test is whether the expected return on investment exceeds the after-tax interest rate, a comparison central to financial leverage. The label describes intent, not outcome: if the investment underperforms, interest rates rise or income falls, productive debt can still become a burden. In crypto, borrowing to fund positions is a form of leverage with far greater risk. Also see debt.