How much debt do you have?
Well, I’ve accumulated quite a bit of debt over the last 10 years. I suppose I’ve been a bit careless and now I’m starting to fill the pressure from it. I mean, I can’t make my monthly payments anymore. But…some of my debt is good, right?
Really, what do you mean?
It’s not all bad because I’m driving a car, I have a house to live in and I’ve got a great college education. It’s just these darn credit cards some recent emergencies and, uh, a little over spending that has pushed me over the edge.
I see.
Well, as you can see it’s pretty easy to rationalize having debt and one of the ways to do this is by trying to focus on positive reasons for having debt.
How Do You Define Debt?
First, what do you believe is the definition of debt? Basically, debt is defined as when you owe something to another. Interestingly, the Urban Dictionary defines debt as when you’re so bored with life that you just spend money to make your life seem more exciting. Ha ha.
Most people get a car or house loan because they wouldn’t otherwise be able to purchase them. Student loans are the same. Maybe you bought an education using a loan because you didn’t have enough cash to pay for your tuition, books, board, etc.
The Bible provides sound principles in describing debt and its impacts. I’ll note that nowhere does the Bible state debt is a sin, but it does give us a pretty good indication of debt and why we should avoid it.
The rich rule over the poor, and the borrower is servant to the lender. Proverbs 22:7
You were bought at a price; do not become slaves of men. 1 Corinthians 7:23
So, when we owe something to someone we’re really in servitude or slavery to that person. Our options are limited because we owe money we can’t use for another purpose if called to do so as Christians.
An Example of Bad Debt
I think most people would agree credit card debt is bad debt. Now, I’m not talking about a few charges on the card you pay off each month. I’m talking about debt. You have to roll the balance over from month to month because you can’t pay it off!
In other words, you’re presuming upon the future using high interest loans making it difficult to pay back and control. Just making the minimum payment alone will result in paying well over what you originally purchased in the long-term. Yes, there is no question; you should avoid credit card debt which is a great example of the slavery mentioned in scripture.
Good Debt?
But, back to our original question . . . Is there such a thing as good debt? In other words is that thing worth going into debt for if it truly brings you increased value in your life? You’ve heard the arguments for considering a house, car and school loan debts as acceptable forms of debt because they provide something of need or important value in return.
Houses provide shelter and most notably they are typically seen as investments and provide tax savings. Many homes appreciate in value growing your money for the future. As a homeowner you can save on taxes.
Cars provide transportation. While they depreciate in value, a car fulfills an important need for transportation. There are certain tax deductions now depending on the type of car you purchase and the car’s environmental friendliness.
Finally, student loans provide you an education. It’s common for parents and students to sign up for a loan for school because what happens if you don’t go to school? Your chances of working in a profession with a good salary and benefits are diminished considerably. Here we are in the interview – What’s your degree in? Uh, I didn’t get one. Oh, well, this job requires a college education! Actually, it probably wouldn’t get to the professional interview stage without the degree – although there are some exceptions.
What’s the bottom line?
Fundamentally, I can’t agree any type of consumer debt is good debt. I’m not saying I wouldn’t tell someone not to go to school because they have to get a student loan, but I certainly wouldn’t say that’s a good situation to be in. I wouldn’t tell someone not to buy an affordable house to avoid debt, but I can’t say having a mortgage payment hanging over your head for 30 or even 15 years is a good thing. And I wouldn’t tell someone not to get a small $5000 car loan to provide necessary transportation for their family, but I couldn’t say owing the bank $5000 is a good thing.
Homes, cars, and school loans shouldn’t be used as excuses to go into debt. The more important question is what do people have to do to avoid such debts?
These three areas are such common forms of debt they’ve become the norm of our American society. Credit cards are frowned upon, but it’s okay to have house, car and school debt? Fundamentally, these things are debt. You own something to another and it boils down to getting something today you can’t afford using someone else’s money.
My belief is our society has to make a major shift to get the personal debt situation under control. Every child has a choice at some point in their life to work, save and plan for their future. Part of their plan has to include saving for such future needs.
So, what’s the bottom line for you? Do you believe in good debts? Do you agree such debts as home, car and student loans should be avoided? How can this be changed for future generations?
{ 16 comments… read them below or add one }
I agree that debt should be avoid. We had recently paid off all debt except for our house. We had just under 8 years left on our 15 year mortgage. Then we decided to adopt internationally. We used an equity line on our house. We paid that off and adopted again using the equity line again. We are starting the process for our third adoption. We decided that the additional debt was outweighed by our desire to raise our children closer together in age and while we are as young as possible. We could wait another two years but we decided not to. Our goal now is to have the house and the equity lines paid off within 10 years.
You said two things that caught my attention:
1) Houses … are typically seen as investments
2) Many homes appreciate in value growing your money for the future.
The recent housing crisis blows those two arguments completely away.
Buying a house (and even signing a mortgage) may not be a bad thing, but houses should not be seen as investments and we certainly shouldn’t count on them going up in value. No man knows tomorrow….
Credit cards are bad credit. My family has used them as a crutch in recent years, and like you, we are paying the price. We do own a home, but I don’t see it as an investment, since an investment would give me income. We all need a place to live, and even though we are working on paying off a mortgage so that we own our house outright, it is still just a liablility. Once we’ve paid it off, the only way to get that equity is to either sell the house (then we would either need to rent or buy a new one to live in), or tap the equity with another loan—that we would then need to pay back.
Thanks for the great article. I love talking about this stuff!
When I started out I was taught to believe there are things like “good” and “bad” debts, but let’s be honest…All debt is bad.
Every time you get yourself a little bit more in debt you give up a little bit of your freedom.
Why is school debt considered good? these days you can’t even get a job that you can credit your school with helping you get, or you can’t get a job that will pay you more had you not had the education.
try getting more money with “leisure Studies” Yes that’s a degree or a Philosophy degree…or today with a psychology or finance or any other kind of degree.
The only degrees that will actually be beneficial are technical, like computer science, and you can get those certifications in 1 year paying $10,000 instead of going to school for 4 years and paying $20k a year. OH yes, and you waste another 3 years you could have been putting towards direct experience
Much like stocks, the last few years have shown us that homes do not necessarily always go up in value either. There are many schools of thoughts on debt but generally speaking my rule is that paying down debt is never a bad thing.
I do think secured debt such as a house, it better than debt that is unsecured. At the end of the day you still have a tangable assest.
to me a good debt is one where the cash obtained are used to make more money and you can thus pay up the debt from the returns obtained. This means that if i was to go to a bank and ask for a $1000, use it to start a business or invest in very good stock and then use the dividends or profits got to pay up the debt and still have some extra left over, then i got good debt on my hands and i can sleep easy because i just gamed the banking system. Debts obtained to get things for personal enjoyment and nothing else are bad debts and are to be avoided
It seems to me that some of the old standards of what good debt and bad debt are defined as has changed. Even some real estate these days would have to be consisered bad debt. Hopefully that will change.
Credit card debt can definitely be an ugly thing, but with the right spending habits, credit is invaluable in this day and age. I agree with Jason’s definition of what debt is and thus credit cards whose balance is paid in full each month isn’t considered debt at all. However, from other comments posted above, I feel that others are getting it confused because of bad personal experiences.
I make sure to educate my kids on what credit cards are and how important proper spending behavior is to their future so that they can grow up with that knowledge without having to learn it the hard way. I only wish my parents had that talk with me when I was their age.
Debt isn’t bad if you can get it to work for you. What’s the problem in taking out a 4% HELOC if you can use it to finance a 6% CD ladder? Sounds like free money to me.
Is everyone looking for certitude in their financial answers, in an uncertain world? Sorry, but there’s no such thing as a guaranteed investment. All you can do is evaluate risk and reward accordingly.
Houses in your area reduced in value over the last couple of years, so yes, let’s paint all of human history throughout the world with the same brush. If you think houses are now a poor investment, can I make an offer on yours?
“Cars provide transportation. While they depreciate in value, a car fulfills an important need for transportation.”
Awesome insight.
Greg said “Houses in your area reduced in value over the last couple of years, so yes, let’s paint all of human history throughout the world with the same brush. If you think houses are now a poor investment, can I make an offer on yours?”
I think you missed the point. I’m certainly not saying that all houses are a poor investment, only that some are a poor investment and it’s difficult to know up front. We shouldn’t assume that any house will only go up in value. A house is a place to live. If we can pay it off or pay it down, then when we move to another house, we increase our chances of equity.
As for making an offer on my house, you’re certainly welcome to contact me. My house was on the market last year, and we pulled it off due to lack of interest. I could sell it to someone who views it as an investment and is looking for a bargain, but I elected to stay and hope for better days. I guess I’m protecting my own investment.
I think some of the discussion may have gotten off-track on the main point I was trying to make. I ask the question – Good debt? And provide what you might most commonly hear as a response to a car loan, home loan, etc. The bottom line – I think they are all debt and debt isn’t really a good thing for people (in my opinion). The question we should be asking is – how can we avoid going into debt for common things and certainly credit cards? Car loans, home loans, etc. have become the norm. Again, I couldn’t discourage someone from a home mortgage (I have one), but I sure would like to see people avoid excessive loans and possibly save while younger to put a lot more down and limit what they owe. I would love to see a change to interupt the normal view point that it’s okay to have a home loan, etc. and see people truly motivated to avoid them (or at least as much of a loan as possible) by saving more and preparing earlier in life.
I hope to have a home of my own some day. It will require a mortgage, unless I win the lottery or something. I don’t consider a mortgage to be bad debt.
That said, I would pay it off as quickly as I could — and I would never consider the home an “investment,” but rather as the place where I live. As another reader pointed out, no one knows the future. Just ask all the people who are underwater today.
One point on “good debt” I never see is in regard to building credit history. I plan to buy a new car (new to me, at least) in the next few months. I also hope to purchase a house a few years down the road. However, I have absolutely no debt experience; I only have credit cards. I could buy the car outright, but I’m thinking I should finance a portion to build some debt experience on my credit history prior to purchasing a house.
I used to think there was a thing called good debt. Not anymore. Good debt to me is any debt that is paid off.
My 2c?
I think there has to be some distinction – I absolutely agree that if/when you’re paying a bank and the hefty fees that they charge for any kind of long term loan/amortization/debt it should be discouraged but unless you are independently wealthy for whatever reason – there are no real options with regards to obtaining a home.
Car loans can possibly be avoided by buying 2nd hand and saving up the amount needed, but this is generally not an option for most people buying their 1st or 10th house.
I guess an option though that people have is to utilize a service like Zopa where at least the interst payments aren’t going to a bank, but rather to other individuals.
However I do agree also with Financial bondage and the sooner that you can get rid of your debt the better.
“My belief is our society has to make a major shift to get the personal debt situation under control.”
I agree with this, but how realistic is it? I think it’s doable with regards to credit cards, but what about houses, cars and student loans? The last one alone is a killer for most kids these days. You can’t get a good job without a degree, but the cost of college is rising far quicker than general inflation and ever “student aid” bill that’s passed only pushes it up further!
The system is unsustainable as it is currently constituted.
Cars are the same way. Automakers have to pay people to buy new cars because they’re unaffordable otherwise. But cash back and ultra low teaser rates only disguise the fact that most people can’t afford the car in the first place..