Is All Debt Bad?

Today, we're going to be diving into a biblical principle found in Proverbs 17:18

The writer of Proverbs says:

“One who lacks sense gives a pledge and puts up security in the presence of his neighbor.”

Many financially good-natured people want to help those who are struggling. They generously step in and help family or friends who are going through financial challenges. A common way to help is to co-sign on a loan for a car or home. Our text calls it “putting up security.” This is a financial transaction that involves some risk, and you are the backup collateral. When we step in to help people, we often discover they’re not able to hold up their end of the bargain.

If and when your family or friend fails to make the payments, you are now responsible for that loan. This can damage or destroy an entire relationship. So, before you enter into a security transaction or co-sign for someone, consider a few questions:

If the person you're helping defaults, are you comfortable with assuming those payments and letting them continue to use the item (a car, home, or appliance) for free? If you aren’t, give it a second thought, as Proverbs warns against doing this for your neighbor. And whether you can afford the payments or not, you don’t have access to the item you’re responsible for.

There are alternative ways to offer help.

Would the person you’re helping be likely to mature or grow through the financial challenge? Signing on a loan could enable them to continue bad behavior and keep them from learning through the challenge. It may be wiser, more helpful, and loving to encourage them to gain financial stability before taking credit or a loan. Teach them basic principles of finance and paying down debt. And they’re not only learning about money. This is what it looks like to exercise faith and depend on the Lord and the promises in His Word; the assurance of provision of our needs. Scripture tells us God will supply all of our needs according to his riches in glory by Christ Jesus. It doesn’t say He will give us all of our wants.

\\ "When we step in to help people, we often discover they’re not able to hold up their end of the bargain."

Consider if money or an item would be better for you to gift outright. Sometimes the person really has been through difficult circumstances beyond their control; a genuine financial hardship. Or maybe they’re young, freshly married, just entering the world, and they haven’t built their credit. Could your gift help them get a leg up, and a new financial start? This gift could be a down payment or a vehicle.

Try to avoid carrying the loan yourself. Your credit will suffer if you’re financially unable to pay or an item gets repossessed. Additionally, the Bible's admonition to give may be a better idea than getting involved in a loan. The Bible generally speaks about debt in a negative way; the borrower is servant to the lender. Staying out of debt is commended in Scripture. It's better to be a lender than to be a borrower, so we should seek to avoid debt whenever possible, especially consumer debt. This is a pro-tip for helping your credit score:

If you use credit cards, pay them off, sometimes more than monthly.

If you wait until the end of the month, and your credit is evaluated in the middle of the month, it may negatively affect your credit score. It shows a use of credit that you actually intend to pay off. When you use a credit card to buy something important, pay it off weekly because showing low or no balance helps your credit score.

\\ "Staying out of debt is commended in Scripture."

What about car debt? Car debt should only be used if rates are extremely low. The car should also be of sufficient quality and not depreciate in value too rapidly. We've all heard that a car depreciates the minute it goes off the lot; it becomes a used car. Car debt is a more attractive tool when it has a high resale value. Start by buying a used vehicle. You will experience less of that initial depreciation of your car, and it will likely be similar or greater in value than the note you're paying off.

You can follow the Lord and Richards principle of OPM: using Other People's Money at low rates. Turn around and use your own money to get higher rates. That's wisdom.

Home debt can be wise because today's housing is virtually impossible to save up for, especially for young singles or couples. You could probably save up over a lifespan. However, we're seeing those values tick up. Home values across the country increased 40-60% over the past two years. How do you keep up? It’s better to get the value of that home locked in and get a very low rate.

The alternative would be to rent while you save. But you're literally putting money into someone else's equity while you're saving at the same time. You have to set aside double the amount of money that you would if you were simply paying off your loan and contributing to your own equity. Renting also places you at the mercy of the landlord. According to the terms of your lease, you could be removed at any time. Price can also go up substantially, versus a fixed price on a home with a fixed principal and interest.

When you buy a home, there is a variable component to your house payment, your taxes and insurance. But that's far less than the full value of the payment. Debt with high interest rates should never be used although current home loans still have moderate interest rates in the 5% range. This increase should be temporary, so it's wise to wait for home mortgage rates to return to 3-4%. Stay out of debt as much as possible and if you do go into debt, it should be for an appreciating asset like a home. And make sure you always get a low rate.

People are often concerned that events out of their control are going to harm their retirement and savings. At Lord and Richards, we sit down with people like you every day to help them develop a written plan and achieve financial independence.

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