Debt Is Not Evil

April 27, 2010 in Debt with 22 Comments

A while back, I wrote an article titled “Is Debt a Sin?“. I explained that God never condemns those who borrow money, but He provides several cautions against debt. I took a strong stance against debt in that article, but I want to make something clear to you.

Most Christian financial ministries are very opposed to debt of any kind. There is almost a sense of debt being evil – something that no Christian should be involved with. But the Bible never says that, and God nowhere forbids the use of debt. God warns against the dangers of debt, but there are prudent uses of debt that Christians should consider.

Good Debt or Bad Debt?

The personal finance world often tries to make a distinction between good debt and bad debt. But that’s pretty stupid. Debt doesn’t have inherent qualities of being good or bad. It all depends on how you use it and why you go into debt. In truth, there are only two kinds of debt: smart debt and dumb debt. That’s really what people mean when they’re talking about good or bad debt.

Smart Debt

Smart debt is the kind of debt that’s used wisely and prudently to achieve your goals. When you’re reasonably sure you can repay the debt, don’t overextend yourself, and will get a good value for the cost of borrowing, you’re making a smart debt choice. We can use smart debt to buy a home, get an education, start a business, or (occasionally) buy a car.

Dumb Debt

Using debt to pay for vacations, shopping sprees, or unplanned, unnecessary purchases is never smart. Going into debt we know we can’t afford to repay is dumb. And borrowing money for risky ventures that are unlikely to succeed is just plain gambling.

But some of the “smart debts” can be dumb as well. Borrowing to buy more house than you need is not necessarily smart. Getting $50,000 in student loans for a degree in a low-paying career field is not very smart. And going into debt to start a business where you have no experience, have done no research, and just have a “feeling” about is flat out stupid.

God Warns Against Dumb Debt

What you’ll realize as you read what the Bible says about debt is that God is mainly warning against dumb debt. Dumb debt can put us in situations where it becomes nearly impossible to serve God as He desires. It can make us worry, drain our finances, and enslave us to our lenders.

But using debt wisely as just another tool in our personal finance belt is fine. In fact, it can often be very wise. Without debt many successful businesses would have never started, many people would never own homes, and many would never be able to get the college education that leads to a successful career.

Obviously, I’m not recommending that you use debt foolishly to start buying everything you want but can’t afford. However, you shouldn’t be completely opposed to using debt either. If you think you’ll be able to repay the debt, don’t get more debt than you need, and ensure you’re getting value for the cost of borrowing, debt can be a good and wise financial choice. But dumb debt will always be dumb – so please avoid it for your own sake.

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About Paul Williams: Paul Williams is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and Enrolled Agent in Lancaster, PA. He has a passion for walking alongside people who want to manage their finances in light of the reality of the kingdom of God. Learn more about his financial planning and tax preparation services.

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Donna

Thank you Paul for such a great article. It is vital that we realize the place of debt in our lives. While debt for a house is okay, it is not okay to borrow for a house you cannot really afford on one income. It is vital that we realize the economy we are now in, this is not the 90′s. I thank God every day for my husband’s wisdom in insisting we have a mortgage that he could pay without my income. This is especially important now that I probably will not be able to return to work due to health issues. Only the Lord knows what tomorrow brings. Following His wisdom we should be prudent and careful with the blessings he gives to us. Again, great post Paul. Thanks.
http://www.covingtoninnovations.com/chrmoney.html Michael Covington

I would say that going into debt that you don’t expect to be able to repay isn’t just dumb, it’s wrong.
More generally, every debt needs to pass at least 2 tests: (1) reasonable assurance of being able to pay it back (perfect certainty never exists in this world); (2) the additional costs of the debt, including interest charges and also loss of flexibility, are worth it; that is, you get added value by having the money available now rather than saving up. (Buying an asset that appreciates, as houses used to, is a prime example; so is buying an education that will increase your earning power.)
The most common debt mistake these days is probably taking out huge student loans for a degree that doesn’t materially increase your earning power — or taking out student loans and then deciding to be a stay-at-home mom!
I would advise people that their debt plans need to be survivable even if things don’t go entirely as originally expected. That is, you have to survive not only the best case, but also the worst reasonably likely case. (Not the worst imaginable case; you can always imagine that something terrible *might* happen. But the worst case that is reasonably likely.)
http://www.providentplan.com Paul Williams

Thanks for your comment, Donna! Your husband is certainly wise for getting a mortgage that can be covered even on only one income. It’s clear that was a smart move in your situation, but I’d recommend that for anyone. It’s quite likely that you will lose one income at some time in your life in a two income household – either by choice or by chance. Putting yourself in a situation where you cannot repay if you lose one income falls into the “dumb” debt category.
http://www.providentplan.com Paul Williams

Thank you for sharing your thoughts, Michael! You’re right in saying that taking debt you don’t think you can repay is wrong. The Bible is quite clear about that.

I like your tests for a debt. Thank you for explaining the second test (additional costs of the debt being worth it). I alluded to that in the post but didn’t go into detail. Your examples are great. Taking out a student loan for a low-paying degree or a degree you’ll never use is foolish.

Your last note is helpful, too. We can’t plan for the absolute worst case scenario, but we can do something to prepare for the most likely worst case scenario. That’s one way I explain investing to people who are worried about the entire U.S. collapsing. If that happens, you’re going to have bigger issues to deal with than your investment portfolio.

Thanks for sharing your insightful comments!
http://www.bradleycoaching.com Deacon Bradley

Great point about “good debt” and “bad debt,” although I hesitate to characterize any debt as “good” b/c it implies it is all good and no bad. More specifically for “bad debt,” you shouldn’t borrow to purchase anything the does not appreciate in value. You listed some great examples (vacation, etc.), and I think it’s important to know the why.

I would also argue that starting a business with debt is not the way to go. True, it may be more difficult or even impossible to start a business without debt, but it’s the best way to do it. Taking on debt to start your business (no matter how certain the profits) puts a lot of pressure on a fledgling organization. If you really need capital there are plenty of other ways to raise it without taking out loans (ie investors).
.-= Deacon Bradley´s last blog ..How Much Was That Stock? =-.
http://www.providentplan.com Paul Williams

Thanks for your comment, Bradley. I don’t call debt good or bad either. It’s just smart or dumb (or sometimes just wrong).

Regarding starting a business – while I personally would prefer to avoid using debt to start a business, it’s not always possible for every situation. Many businesses (those with high start-up costs for inventory/machinery/etc.) use a combination of investment and debt. I don’t think that it’s the wrong way to go, but you definitely need to be more careful when taking on such debt. However, for many small businesses that an individual might start, it’s certainly possible and probably better to find a way to start without debt.
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http://redeemingriches.com Jason @ Redeeming Riches

Good post Paul! I appreciate the balanced look at debt. You’re right, there are many who call debt a sin at all times. Thanks for the post!
.-= Jason @ Redeeming Riches´s last blog ..This Week in Personal Finance – May 1, 2010 =-.
http://www.providentplan.com Paul Williams

Thanks, Jason. I’m glad you liked it. I think it’s key to find balance in our approach. We’re most likely to make mistakes when we only focus on one extreme and ignore the benefits of the other side.
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BD

You forgot about “Unavoidable Debt”.
Sometimes debt is neither smart nor dumb… it’s simply unavoidable. If you are in a low-income situation, and can’t save much, but experience a medical disaster or lose everything in a fire, or your method of transportation that gets you to work breaks down and you have to spend money to replace it, you will be forced into Unavoidable Debt. It’s neither smart nor dumb, you simply didn’t have enough money saved up to avoid it (even if you were an avid saver and saved all you could, because your earning power is low).

Most of the Christians I know (including myself) had debt due to tragedies, trials and problems that were unavoidable. We were thankful that God gave us the means of paying for such problems with Credit Cards, since we all didn’t have huge savings accounts, due to having low earning power, despite being avid savers and wise stewards.
http://www.providentplan.com Paul Williams

Thanks for your comment, BD! You’ve made a good point. I guess I didn’t consider it in this article since I was thinking of debt that we might choose to use. Unavoidable debts aren’t really a choice. I’m wondering what other alternatives there could be for solving some of the problems you highlighted. Insurance could help with the first two examples (but that’s if you can afford the insurance). And it’s possible to live without a car, but it requires living close to work, the grocery store, and other places you frequent. That’s not always a viable solution for everyone. Are there any alternatives you can think of for the situations you mentioned?

Thanks again for taking the time to comment. This is a good subject, so I might write an article just about unavoidable debt.
http://www.covingtoninnovations.com/chrmoney.html Michael Covington

Very good point, BD. By the way, some Christian counselors say, “Don’t borrow money — just work out a payment plan with the doctor (or hospital, or mechanic, etc.).” That *is* borrowing money! And it is sometimes unavoidable.
http://financialbondage.org Financialbondage

Since new cars lose 25% of value the first year, and 70% by year 4, I’m not sure I would agree that a new car is good debt. Car payments they can’t afford is one big reason most Americans are broke. You are right, debt is not evil. God has no problem with Christians borrowing money. He does however, warn us that borrowing is a bad idea. “The borrower is a slave to the lender”. Proverbs 22:7
http://www.providentplan.com Paul Williams

Thanks for taking the time to share your thoughts, Financial Bondage. I never said getting a loan to buy a new car is a good idea. I just said that going into debt to get a car could occasionally be a good idea. If it’s absolutely necessary for someone to get to work and they have no other way to pay for the car, then it might not be a terrible idea for them to go into debt to buy it. That doesn’t mean they should neglect searching for a good deal on a quality used car.

The article I linked to in the first paragraph discusses some of God’s warnings against debt. The point of this article is not to encourage debt but to show that there are reasonable uses for debt. An all-out hatred and avoidance of debt is not Biblically sound and can actually be quite detrimental and unwise. Even so, I think having as little debt as possible is a good idea most of the time.
http://www.covingtoninnovations.com/chrmoney.html Michael Covington

I agree that borrowing money to buy a new car is rarely prudent — it might be if the car were needed to earn money and a suitable one is not available used (a rare situation in today’s market, but it happened regularly 50 years ago).
When you say “God has no problem with Christians borrowing money. He does…warn…that borrowing is a bad idea.” you seem to be contradicting yourself. Knowingly behaving foolishly is sin. If by “bad idea” you simply mean “more risky and burdensome than many people realize” then I agree with you.
The phrase “financial bondage” is tossed around a lot without a clear meaning. I think the proper, clear meaning behind it is that a debt has costs besides the principal and interest: it also costs you flexibility (freedom) by committing you to pay out money that you don’t have yet.
http://www.covingtoninnovations.com/chrmoney.html Michael Covington

By the way, I like my cars “well broken in.” I consider a car new if it has only 50,000 miles on it.
http://www.providentplan.com Paul Williams

Thanks for comments, Michael. I appreciate your point of view on this. Hope you’re doing well!
Dave Benson

Hi Paul,

I appreciate your articles and website! Great insight for a world in so much personal debt!

I think it comes down to a blessing from God versus us trying to work things out for ourselves. I’m 29 years of age and have previously borrowed money for houses, cars, businesses, paying back personal debt etc…. Since getting completely out of debt, I have experienced Gods blessing and provision like never before.

As far as houses are concerned, I live in Sydney Australia where it is much cheaper to rent a house than buy. And with financial uncertainty ahead, there is no certainty of capital gains in the housing market here.

I cannot think of a situation where Gods hand of blessing will be upon anyone that chooses to get into debt…

Can you give me your thoughts on this?
http://www.providentplan.com Paul Williams

Hi, Dave. I don’t think it’s so much an issue of whether God will or will not bless someone who goes into debt or gets out of debt. The bigger issue I see in Scripture is a caution against foolishly going into debt. Now foolishly can mean many things, but I think it boils down to motives and desires. Why are you getting into debt? Are you reasonably sure you can pay it back? What will happen in the most likely worst case scenario (not end of the world stuff, but what if you lost your job)? Are you getting a good value or buying into hype?

Even deeper than that is the issue of contentment and reliance. Are you going into debt to get something because you think it will make you happier? Are you trying to get things earlier even though you can’t really afford them?

There is no place in Scripture where you’ll read God saying that He’s not going to bless someone who goes into debt. He certainly warns against foolish borrowing, but He also provides plenty of guidance for making lending and borrowing equitable for both parties. And He’s especially concerned with how we treat the poor who have borrowed from us. Now if God’s hand of blessing will not be on a person who borrows, why would He give us guidelines about how to treat others who borrow from us or about how we should repay when we borrow? Specifically, is He saying go ahead and lend to the poor but I’m (God) not going to bless them because they’ve borrowed?
http://www.covingtoninnovations.com/chrmoney.html Michael Covington

Surely God has blessed a lot of people who borrowed prudently for housing (in a rising market), business ventures, and/or education. The house that I live in right now is the fruit of decades of careful real estate transactions by my parents, involving borrowed money. “Debt is evil” is not a doctrine I find in the Bible.