Leverage is the use of borrowed money or debt to purchase assets or undertake an investment, often in real estate. Leveraging is a high risk, high reward strategy, used by both individuals and corporations. Leveraging allows a buyer to purchase assets worth more money than they have available, thus increasing the potential for returns on investment. Leveraging works when the returns outweigh the costs of borrowing, resulting in profits for the buyer. However, if a leveraged investment underperforms or decreases in value, buyers could lose a lot of money.
For example, if a buyer borrows money to purchase a property, and the real estate market declines, the buyer will owe more money to lenders than she will earn in returns from the property. A corporation or individual that has taken on more debt than they have equity and operating cash is called "highly leveraged." Highly leveraged companies with too much debt carry a high risk of default or bankruptcy.
[Last updated in June of 2020 by the Wex Definitions Team]