Good Debt vs Bad Debt
A Smarter Way to Use Debt
Debt is an almost unavoidable part of modern day life. Â This isnâ€™t necessarily a bad thing as long as your debts are kept at an appropriate level. In fact when managed properly, debt can be used to your advantage especially if you have deductible debt. Find out a smarter way to use debt:
Not all debt is the same. Â Â Many people think of all debt in the same way but it can be classified one of two ways:
- Non-deductible debt is money that has been borrowed to buy personal items. Â For example, credit cards, car loans and home loans are all classified as non- deductible debt. Â This is because the interest you pay on this type of debt is not tax deductible.
- Deductible debt is money that has been borrowed to buy an income producing investment. Â This includes debt such as investment loans used to purchase a share portfolio, an investment property or managed funds. As the name suggests, this type of debt is tax deductible.
A better way of using debt
Your mortgage is probably your biggest debt, but interest repayments on your home loan are not tax deductible. Â So while you get the benefit of being able to purchase a home much sooner, you pay handsomely for the convenience.
But if youâ€™ve had your mortgage for some time, you may have some equity in your home that could be used to restructure your debt in a way that is more beneficial for you. Â For instance, it is possible to borrow up to 80% of the value of your home. Â This money could then be used toÂ reduce some of your non-deductible debts that charge higher interest rates, such as credit card debt, or simply as an emergency cash reserve.
Restructuring your debt using a line of credit. Â Â Another way of restructuring your debt is to consolidate your non- deductible debt into a single loan using a line of credit facility.