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Articles by Salesh Chand

SHOULD I PAY THE PRINCIPAL OFF MY LOAN?

AUTHOR: Salesh Chand

POSTED: 20 February 2013

I get asked this question on a regular basis. The answer is simple: yes you should pay the principal off your loan. But then the question arises, which loan should I pay first - investment or personal? And, how much should I pay?

You should always pay off your personal loan first as this is non-deductible for tax purposes. Unlike an investment loan, you get absolutely no tax advantage from interest payments that relate to personal debt. Once the personal loan is paid you should consider reducing your investment debt. Paying off your loans means you are continuously growing your equity so the banks will consider you to be less risky, and as a result they'll be willing to lend you more funds for further investments.

Exactly how much debt to pay should be calculated in relation to your personal budget and surplus cash. Firstly, you will need to look at your budget and work out what surplus cash you have available. Once you have determined this amount, you apply it towards the loan. This is what we call "forced savings", here at GRA. To help you work out what your surplus is, you can use our Wealth Suite software, which will also allow you to analyse cash flow positive or negative investments, and identify those investments you should be selling. But what if you don't have any surplus cash? Then you'll need to have a good hard look at your budget and see where you can cut back on your spending so you can create a surplus.

For any investor, cash/equity is king, so it is important that you are paying off your loan, and not using your surplus cash for impulse buying. The more equity you have, the safer you appear as a client in the bank's eyes. If there is another recession and the bank tightens their lending criteria, you will have no issues because your equity to debt ratio will be compatible with the bank's requirements.

So in summary, it is important that surplus cash is used to reduce personal debt first, followed by investment debt, for a better ongoing investing outcome.

For help with reducing your debt as discussed in this blog, please contact GRA on (09) 522 7955 or by clicking here.

Request a Meeting

Salesh Chand
Partner/Business Advisory Director

09 522-7955

saleshc@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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This letter is to express my appreciation for the assistance and encouragement of both Anthony Lipscombe and particularly John Heaslip over the last financial year. The period since activating my trading trust has been one of considerable stress, as well as personal development, as I embarked on this as a relative business neophyte with virtually no awareness of the contemporary requirements of running a business, particularly the financial records aspect. During much of this period I have therefore felt considerable out of my depth. However I have been lucky enough to have had the benefit of the advice and support of John Heaslip in rationalizing what was a fairly chaotic set of records of the first year property trading. I am able to say that John in particular, has been unstinting in his attention to my needs and has done so in a manner which has never alluded to my extremely rudimentary grasp of managing a business, or even of being unable to set out a spread sheet properly. The result of the above guidance is that now, although my trading trust would still not be able to operate without the advice of GRA, I do least feel a sense of satisfaction that I have got to my present point without major disaster and that my property trust does now have some kind of firmer basis for any future activities - Name withheld by request

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