Is it permissible to deduct the debt that I owe from the debt that is owed to me by the creditor, even if what I borrowed from him is less than what he will pay me?

A loan is a contract of benevolence, and it is not permissible to stipulate any benefit for the lender, for every loan that brings a benefit is usury (riba).

Accordingly: 1. Your act of purchasing for the lender: If it costs you nothing, or if it was customary before the loan, there is no harm. However, if it would normally require a fee and was not customary before the loan, it is not permissible to do it for free, because it is a benefit resulting from the loan, which is usury, unless the lender intends to reward him or deduct it from his debt. 2. Donating an amount in excess of the debt: There is no harm in this if it was not stipulated in the loan, based on the hadith: "The best among you are those who are best in paying off debts." So, if the borrower pays back more than what he borrowed, it is permissible, provided it was not stipulated, as Ibn Qudamah said: "Only the stipulated increase is forbidden."