Borrowed Capital

What is 'Borrowed Capital'

Borrowed capital consists of funds borrowed from either individuals or institutions. Borrowed capital can be used in a number of ways. Investors use borrowed capital to increase their potential investment returns; this use is known as leverage. The upside of investing with borrowed capital is the potential for greater percentage gains; the downside is the potential loss of someone else's money, which must then be repaid. Another way borrowed capital can be used is by businesses as a loan or debenture.

Also referred to as "loan capital."

BREAKING DOWN 'Borrowed Capital'

Investors commonly use borrowed capital when trading in the forex markets. Critics consider this leveraged trading to be dangerous, while proponents argue that with the proper precautions, such as the placing of stops, investors can achieve their goals faster without taking on too much risk.

People who take out a mortgage to buy a home are also using borrowed capital. In this case, the purpose of borrowing capital is not necessarily to improve potential investment returns, but to make it possible to purchase an expensive asset that is difficult to pay for in one lump sum.

RELATED TERMS
  1. Net Borrower

    An entity that borrows more than it saves or lends out. A net ...
  2. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  3. Stock Loan Fee

    A fee charged by a brokerage firm to a client for borrowing shares. ...
  4. Open-End Mortgage

    A type of mortgage that allows the borrower to increase the amount ...
  5. Reverse Mortgage Financial Assessment

    A review of the borrower’s credit history, employment history, ...
  6. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of ...
Related Articles
  1. Investing

    Leverage

    Learn more on how leveraged investing can help you with higher investment profits through the use of borrowed money.
  2. Markets

    What's a Revolving Line of Credit?

    A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis.
  3. Investing

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  4. Investing

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  5. Personal Finance

    Reverse Mortgage

    Learn more about this method of borrowing money against the value of your home.
  6. Personal Finance

    Leverage: Increasing Your Real Estate Net Worth

    Leverage is the use of financial instruments or borrowed capital to increase an investment’s potential return.
  7. Investing

    Understanding Credit Risk

    Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt.
  8. Investing

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  9. Financial Advisor

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  10. Investing

    Explaining Leveraged Loans

    Leveraged loans are loans extended to companies or people who already have large amounts of debt.
RELATED FAQS
  1. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Learn the five Cs of credit, why they are important and how banks use them to understand and mitigate risks when making loans ... Read Answer >>
  2. What is the difference between the Five Cs of Credit and credit rating?

    Learn the difference between the five C's of credit and credit rating and how they are used together by banks and finance ... Read Answer >>
  3. How does a credit crunch occur?

    A credit crunch occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to ... Read Answer >>
  4. How do banks measure the Five Cs of Credit?

    Learn about the five C's of credit and what qualitative and quantitative methods banks use to measure them when evaluating ... Read Answer >>
  5. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
  6. How does total capital investment influence economic growth?

    Discover the basic relationship between capital investment and economic growth, and why improving the capital structure increases ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center