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 Life Online 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.