Originally Posted by Capt_Flrp
My financial adviser suggests that taking out a loan so that I can deduct the interest at tax time is extremely erroneous.
And for you it might be, but for other people it might make perfect sense.
Let's apply some fictional numbers to illustrate the point...
Let's say that you have an investment account that has recently been earning an average of 5% return per year. Let's say you can take money
out of this account to pay for your boat, or you can get a loan at 5% interest per year. It's a wash either way, right? Well, no, because if you can deduct the interest paid from your taxes then the loan will not cost you 5% per year. If you're in the 30% tax bracket then in the end the loan will only cost you 3.5% per year. Obviously, if you can earn 5% while paying 3.5% then you are ahead of the game
But, of course, it's not quite that simple. For example, the 3.5% that you will be paying is an absolutely guaranteed amount. The 5% that you're earning on your investments is probably not guaranteed; it may go up, it may go down. So now you also have to consider, just how sure are you that your investments are going to continue to earn more than 3.5% over the life of the loan? If you are very, very sure then it makes sense to borrow the money. If you are not so sure then maybe you should pay cash.
Then, too, there is the inner satisfaction of knowing that you have no debt and you're not beholden to anyone else for your boat. No one can tell you what kind of insurance
you have to get, and no one else's name is on the title. That is worth something. Is it worth the 1.5% you would forgo to get it? Maybe so. Maybe not. That's something each person has to decide for themselves.
Like I said, these are fictional numbers, but they are representative of the calculation that needs to be done in a case like this, and as you can see it is a relatively simple calculation. The final calculation--the value you put on being debt-free--that's a whole different matter, and often not a simple calculation at all.