Deductible vs non deductible debt
“Debt, an ingenious substitute for the chain and whip of the slave driver.” – Ambrose Bierce
All loans are not equal. If the purpose of the loan is to produce taxable income, you can claim the interest as a tax deduction, which means the Government may pay nearly half of it. These loans are called deductible loans and are usually used to buy investment properties or shares or a business. However, if the loan is for a private purpose such as buying your own home or upgrading the family car, the interest is not tax deductible. This is why smart money managers keep their investment loans on an interest only basis while they pour all their spare cash into paying off their non-deductible loans. After all, the effective interest rate on these is nearly double what you pay on deductible loans.