Debt Reduction & Debt Recycling
For some clients, paying off their home loans, credit cards, personal loans and car loans is their main focus. Lyn Eddy is able to show them how to identify the difference between “good debt” and “bad debt”.
Good debt has some important characteristics:
- The underlying asset will produce an income
- The underlying asset will grow in value over time
- The interest charged on the debt can be claimed as a tax deduction
Bad debt has none of the above characteristics and typically includes car loans, credit cards, personal loans etc.
Some advisers also describe a home loan as being in this category. While it does not have all the characteristics of bad debt, at least the value of the underlying asset (the family home) will rise over the long term.
Debt recycling helps use good debt to invest and the income generated to pay off the bad debt. This concept of using borrowed funds to invest is also known as a gearing or leveraging. Most people are happy to use this strategy when buying an investment property but some clients are unaware that it can also be used to buy more “liquid” investments such as managed funds and shares.
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