Negative and positive gearing

Most businesses and many people borrow money at some stage to make a purchase, or to invest. Also known as ‘gearing’, borrowing to invest includes any type of borrowing to invest, whether it is a cash loan for a new business, investment property or for buying shares.

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Gearing is often considered to be highly risky, but it can also be good debt and the association of high risk with gearing only applies if the borrower has failed to plan for their gearing.

One major advantage of borrowing to invest or gearing is that it allows investors to almost instantaneously access more funds. This allows them to reap large returns on investments. As an investor, you’ll have more funds available which will allow you to take advantage of opportunities as they arise and diversify their investment portfolio.

Through gearing, you can have quick access to funds by taking out a quick cash loan when a good speculative or share opportunity arises. If you’re a smart, experienced investor, you’ll know when to use quick loans to pool funds and multiply returns. On the other hand, there are some newbies who fail and lose more (or in worse cases everything) when the market fails and still have to pay the loan – this results in negative gearing.

Negative gearing is an offset against any other sources of income that you have so you end up paying less tax. It happens when the interest and costs associated with the investment are more than the income you receive from the shares, property, or any other kind of investment. In other words, negative gearing applies to any sort of money borrowed to purchase any income-generating investment, and not only property.

For more on positive, negative gearing, and everything you need to learn about borrowing to invest, read this: