Debt is a very common tool that most of us use at some point to acquire something we need. It has become very normal to owe some money for a house payment, a vehicle payment, or a credit card payment. In some cases, debt is allowed with no interest on the repayment of a loan. Many new vehicles will offer a no interest loan to entice customers to make the plunge and take home that new car. It’s hard to pass up the deal where someone will let you take something for no money, but the promise to make payments for a time in the future to settle the debt.
And so the question is, “What is wrong with debt if I can afford it”? Really what that means, is what is wrong if I can afford the monthly payment. As in the example with the new card, the car company will ask what monthly payment you can afford. So if you have $350 margin in your budget, then the likely answer is $350 is an affordable payment. At this point, the payment becomes just like another bill that is due such as the water bill, or the electric bill, or any other monthly bill. So it becomes a math question and what payments can we fit in each month before we exceed our income. If we can fit $400 in our budget rather than $350, then we can upgrade the car and get something nicer because we can afford it.
What that Monthly Payment Really Means
At this point, I have focused on a car payment, but there is also other debts such as a mortgage. There are also unsecured debts such as credit cards and loans to retail stores that are common. But to continue with the car payments, here is what the monthly payment really means. Most of us, including me, focus mostly on the monthly payment and treat it as a bill. However, what can be lost in all of this is the actual total debt that is owed. Remember that car dealerships don’t mention price of the vehicle very much. At least they didn’t last time I purchased a vehicle which was about seven years ago. Instead they only tell you the monthly payment.
Downside of the Car Loan
If the monthly payment was $350 and I agreed to a six year loan, I just agreed to pay back $25,200 and that is if I didn’t have to pay interest. It doesn’t sound too bad, but it’s a slow process to pay back that amount of money over a six year period. Now if the car begins to have issues, or materialism creeps in and you start to want to upgrade three to four years later, you will still owe around $10,000 on that car. You also still have two to three years of payments that are due. It is also possible, as I have experienced once, that you owe more than what your vehicle is worth.
The problem with the car payment in this scenario wasn’t the monthly amount. The issue was the total amount. The total amount was too great and the time period was too long and outlasted our desire to have that particular car. Now if we want to replace the card, we will likely have higher payments for the next go around. After all, cars like everything continue to go up in price and maybe the next loan will include interest.
Downside of the Credit Card Payments
This one is different than the car loan in that the reason to use credit cards varies greatly. Some use them out of need in an emergency, if they don’t have an emergency fund already established. Others use them to make a purchase now and intend to pay the balance later. And there are still many more reasons. However, credit cards can be a slippery slope.
It seems innocent enough to spend a little bit of money using a credit card. It might only start with one or two transactions and a small amount that could easily be paid back. The danger comes when one or two transactions yields quickly to a dozen or more and a balance that cannot be paid back easily. When this happens, finance charges and fees are usually close behind. Now the small balance has become too large to pay, and there is a monthly bill (finance charges) attached.
Downside of the Home Loan
How many of us know what we will be doing in thirty years? That seems so very far off, and you probably know where I am going with this. When we purchase a home, the standard is a 30 year loan. This kind of comes about like the car loan. We are less concerned with the amount of money being spent, or the length of the loan. We are mostly considering the monthly payment and if we can afford it.
In the short term, the loan seems fine. However, if we think about it, thirty years is a long time. That means if you purchase a house at thirty-five years old, and make the regular payments, and stay in the home, it will be paid off just as retirement starts at sixty-five.
Yes, real estate appreciates and the home will be worth considerably more after thirty years. Still, the interest on a thirty year loan is quite a bit of money. Can you imagine instead of paying a bank interest for thirty years what you can do with that money. Of course that doesn’t mean a home loan is wrong, but perhaps we should consider more than just the monthly payment when making a home purchase on a thirty year term loan.
Is Debt Worth It
You might be thinking that this article doesn’t really put debt in a good light. And you would be correct. I have dealt personally with all of these debts individually by themselves, and all together at the same time. The information presented is based on my experience with debt. I struggled with debt for quite a while and would never allow debt again if possible.
In the case of real estate, I do think that a home loan is reasonable of course considering that it will be difficult these days to save $250K or more to purchase a home with cash. However, before agreeing to a thirty year loan and paying no money down, consider saving money for a down payment. Also consider less house and a shorter term loan to get it paid in fifteen years instead of thirty.
Again speaking from my experience, there is a feeling of being trapped that comes from mounting debt. The second half of Proverbs 22:7 says that, “the borrower is slave of the lender”. This is true in many respects. In addition to this, it doesn’t seem mathematically wise to voluntarily give money to a bank each month in the form of interest, finance charges, or late fees. If I added up all of the interest that I have paid to banks over the year, it might make me sick.