Different loans make for huge differences in tax

IF YOU are going to make the best use of your hard earned money, you need to understand the difference between deductible and non-deductible loans.

When you have a loan for investment,  you are able to claim the interest off your tax which means the Government effectively pays up to 46.5% of it.

In contrast, if the loan is for a private purpose such as buying your own home or buying a car, the interest is non-deductible and so costs much more.

Recently I was talking to clients who had a $150,000 loan for their business on an investment property and a $250 000 loan on their own home. Because they didn't understand finance, they were paying $2200 a month on the investment loan and $1500 a month on the home loan.

I suggested they convert the loan on the business to interest only which would reduce the payments to $750 a month and free up $1450 a month to speed up the repayments on the non-deductible housing loan.

This reduced the term of the housing loan from 30 years to nine years and saved them a staggering $214 000 of interest.

Another client was thinking of withdrawing $40 000 from their savings to buy a car and asked me if it would be better to leave the savings intact and borrow for the car.

Bearing in mind the importance of maximising their tax deductions, I suggested they pay cash for the car and then borrow $40 000 to invest in quality share trusts.

This enabled them to boost their asset base and also enjoy a tax deduction for the interest

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.