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Is high financial leverage always bad?

Updated: 8/17/2019
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9y ago

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No

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Q: Is high financial leverage always bad?
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Can financial leverage be zero?

Yes, it is possible for financial leverage to be zero. Whomever is wanting to control or buy/sell an asset would be required to put up the entire cost of the contract. For example, if you wanted to buy a house that was worth $200,000, if you put down $20,000 and took the rest out in a loan, that would be $200,000 / 20,000 = 10 or 10:1 leverage. With zero leverage, or 1:1 leverage, reusing the example above, you would be required to put up the entire $200,000 to buy the house. Not bad if you have the entire $200,000 to put up, and this would guarantee that you have fully covered the cost of the asset you are purchasing. Usually most people favor leverage, so that they can use the money to do other things. Cash is still king, and you usually want to hold on to as much of it as practically possible.


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