Leverage refers to the strategy of utilizing borrowed funds for investment, with the anticipation that the returns will exceed the cost of borrowing. For instance, a company may borrow an amount significantly higher than its earnings to facilitate expansion.

Similarly, homebuyers often secure mortgages that are multiple times their annual income. The risk, however, lies in the potential for the investment to depreciate in value. In such cases, the initial capital can be quickly depleted, leaving the borrower still responsible for the ongoing financing costs. Using the home purchasing scenario as an example, a drop in the property’s value could result in negative equity, meaning the homeowner owes more on the mortgage than the current market value of the house.