What kinds of debt are permissible?

Answer:

Firms go out their way to offer me credit,
For which, I might say, I am deeply indebted!
-- Doris O'Brien

The borrowing and lending of money is an industry that has existed for thousands of years, but in recent decades society's attitude toward debt has rapidly changed. Once a debt was a sign of desperation, but now it is common. Once it was restricted to only very large purchases, such as land, but now it is used for day-to-day transactions. Once it was only incurred by adults, but now it is being sold to college, high school, and even junior high students. It has become widespread because firms make a lot of money from debts. Debt is the only product where the customer comes to the firm begging for the privilege of purchasing the firm's product.

Avoid Debt

But what about the Christian? Should a Christian incur debt? For the Christian, the general principle is "Owe no one anything except to love one another, for he who loves another has fulfilled the law" (Romans 13:8). The principle is not to never have a debt, but not to have a debt that you cannot repay. The reason is straight forward. To borrow money without paying it back is causing harm to the person who loaned you the money. "The wicked borrows and does not repay, but the righteous shows mercy and gives" (Psalms 37:21).

Yet, we must keep in mind that any debt incurred places us in an obligation to the lender. It a real sense it becomes a form of slavery. "The rich rules over the poor, and the borrower is servant to the lender" (Proverbs 22:7). Once you borrow money, you give up rights. You can no longer spend your funds any way that you desire. You have obligations that must be fulfilled and those obligations to the lender generally come first. "He shall lend to you, but you shall not lend to him; he shall be the head, and you shall be the tail" (Deuteronomy 28:44). In other words, when you borrow money, the lender gets to make the decisions and you are forced to follow.

Only Purchase That Which You Can Pay

To purchase something which you cannot afford is both stealing and lying. It is stealing because you took something that was not paid for at the agreed terms. It is lying because you made an agreement that you did not keep. Under the Old Law, an Israelite was not allowed to promise (borrowing is a type of promise) what he was not able to pay. "Better not to vow than to vow and not pay" (Ecclesiastes 5:5). Some might object and say "I'm not promising God, I just promised the bank." Yet, remember that under the New Law, a Christian's word is his bond. "But I say to you, do not swear at all: neither by heaven, for it is God's throne; nor by the earth, for it is His footstool; nor by Jerusalem, for it is the city of the great King. Nor shall you swear by your head, because you cannot make one hair white or black. But let your 'Yes' be 'Yes,' and your 'No,' 'No.' For whatever is more than these is from the evil one" (Matthew 5:34-37). We don't need dire oaths to force us to keep our word. Our agreement or disagreement is all that is needed.

Since borrowing obligates you to pay, do not put necessities up as collateral. If you can't afford to lose it, don't use it to back up a loan. Michelle Singletary in her newspaper column once quoted her grandmother's sage advice given to her as she was about to leave for college: "At your age, a credit card ain't nothing but trouble. All you're doing is promising to pay later what you don't have today, and what makes you think if you don't have it today, you'll have it tomorrow?"

None of us control the future. Most people borrow figuring that at their present income level, they can make the payments. But that is a big assumption. You are assuming that you know your future income will be steady or will rise. However, the future is guaranteed to be uncertain. "Come now, you who say, "Today or tomorrow we will go to such and such a city, spend a year there, buy and sell, and make a profit"; whereas you do not know what will happen tomorrow. For what is your life? It is even a vapor that appears for a little time and then vanishes away" (James 4:13-14). What happens if you get laid off from work? What happens if you are injured and cannot work for a period of time?

Obviously, no one can cover all possible future outcomes, but you should make a reasonable attempt. After all, you gave your word that you would pay off your obligation. If you chose to enter into debt, then you are choosing to give up whatever you offered as collateral in the event that you do not make your payments. Hence, does it make sense to take out a home equity loan to purchase a luxury item, such as big screen TV or a boat? Are you willing to accept the possibility of giving up your house for such items? After all, that is what a home equity loan is -- a promise to give up a portion of your house if you don't make your payments. Now I'm not saying that having luxury items is wrong, but I am saying that I can't think of a time when it is worth risking a necessity in order to have a luxury.

Some Debt Benefits the Wrong People

"He who oppresses the poor to increase his riches, and he who gives to the rich, will surely come to poverty" (Proverbs 22:16). Generally, it is the wealthy who loan money because they can afford to live without the money for a period of time. When you borrow money, you obligate yourself to pay back the money plus additional interest. In other words, when you borrow from the rich, you are helping the rich get richer. Have you noticed who owns the big buildings downtown? In my area, the largest building in town is owned by a bank. The interest paid on loans is what built that building.

The reason for mentioning this is that some people think that if they borrow money they can dig themselves out of the financial mess that they made in their lives. Borrowing money doesn't benefit the borrower, it benefits the lender. For the borrower, debt is the means for lowering your future income.

Let me illustrate the principle. Let's say I have $2,000 in the bank and I want to buy a car. I could buy a $22,000 new car with $2,000 down and finance it for five years at 8% interest. The payments would be $405 per month. At the end of three years, I would have a three-year-old used car on which I still owed $8,966. Most likely, I would owe more than the car is worth at that time.

Instead, suppose I buy a clunker of a used car for $2,000 cash. Now a clunker would need repairs more often, so let me suppose that I set aside $100 per month to keep it running. But let me also suppose that I save the remaining $300 per month that I would have made in car payments. At the end of three years, I probably would have a clunker that is now only worth $1,000, but I would have $11,493 in the bank (assuming it was invested at 4% interest). I could sell the clunker and buy a fairly nice car for $12,000.

In the first scenario, I borrowed against my future, so in the future, I had less money in my pocket. In fact, I owed more than I owned. I lost and the bank gained. However, in the second scenario, by living within my means at the start, I had more money in the future. I kept the money that would have gone to enrich the bank. Repeat this cycle a few times and you will see that the borrower never finishes making a car payment, but the saver could continue to buy a nice replacement car every three years and still see his savings increase. Which is more reasonable?

What Is Reasonable Debt?

Only borrow money

1. If you have a reasonable expectation of being able to pay it off.
2. If the payments for the debt do not interfere with purchasing basic necessities, such as food, clothing, and shelter.

For example, borrowing money for a home, while perhaps not the best choice, is reasonable assuming you are buying within your means. After all, you have to live somewhere; so if you don't own a home you will likely to be renting a place. The cost of owning a home is generally higher than the cost of renting, but there is a slow build up of equity in the home that doesn't exist when renting.

College loans are usually justified by the argument that you will be able to make more money with greater education. While this might be true in general, it is not guaranteed. I know a lot of well-educated people who have been unable to find a job. The real question is can you make the payments on the loan when you leave school, even if you don't find a great job for several years? College can be very expensive and even with low-interest rate loans, a loan of $50,000 or $100,000 can have a significant monthly payment. I know far too many people who are still paying off college debts ten or twenty years later.

The fact is that there are numerous ways to pay for college without going into debt. There are grants and scholarships available, but you have to be willing to work at applying for them. You can work while taking classes. Some schools have cooperative education programs where you can work for one semester and then go to class the next. A large number of companies are willing to reimburse their employee's business expenses if the classes will aid the business. These alternatives take more effort, but they can avoid an unnecessary obligation.

Borrowing for things that depreciate in value doesn't make sense. You are paying extra (the interest) for something that is continuing to be less valuable over time. This is why most people end up being "upside down" in their car loans. They owe more money than their car is worth.

Borrowing for consumables is not wise either. Putting today's fast food meal on a credit card and then continue to pay for it over the next two or three years is not a wise use of money.

Don't borrow simply because you want the item. Many people purchase items they can't immediately afford because they don't want to appear to be behind the times. The problem is that purchases are motivated by worldly desires instead of sensible living. God's word is "teaching us that, denying ungodliness and worldly lusts, we should live soberly, righteously, and godly in the present age" (Titus 2:12). We don't want to develop a habit of playing to our personal indulgences.

Don't borrow simply to speed up the acquisition. Too many want something now. They are unwilling to invest the time to purchase it later. "The plans of the diligent lead surely to plenty, but those of everyone who is hasty, surely to poverty" (Proverbs 21:5). The convenience of credit plays to people's discontent. "Now godliness with contentment is great gain. For we brought nothing into this world, and it is certain we can carry nothing out. And having food and clothing, with these we shall be content" (I Timothy 6:6-8). Instant credit caters to impulse buying and hinders planning ahead. It is a recorded fact that consumers will spend 25% more when they use credit than when they use cash. There is a visual feedback when you spend cash that you don't get when you spend credit.

What If I Already Owe Too Much?

First and foremost, stop contributing to the problem! "A prudent man foresees evil and hides himself, but the simple pass on and are punished" (Proverbs 22:3). It is amazing how many people see that they are on the wrong path, but they continue to walk it. If you have too much debt, cut up the credit cards! That will certainly stop you from using them.

Second, start living within your means. Now that is going to take planning and the dread budget, but you can't tackle a problem haphazardly. You need a plan (Proverbs 21:5) and a budget is a plan for how you are going to spend your income over the next month.

Finally, keep your word. You made the debt. It is your obligation to repay it, even if it was stupidity on your part to incur the debt in the first place.