Avoiding Debt


Text: I Timothy 6:6-12


Firms go out of their way to offer me credit,

For which, I might say, I am deeply indebted! – Doris O’Brien –

 

I.         A large industry has developed in the past hundred years or so

            A.        It has existed for centuries, but it was commonly frowned upon until recent decades

            B.        Once debt was a sign of desperation. Now it is common.

            C.        Once it was used for large purchases, now it is used for day-to-day transactions

            D.        Once it was incurred by adults, now it is being sold to younger and younger people.

                        1.         It is notorious that credit card companies sell to college students. (Colleges by the way get a cut of the transactions)

                        2.         Now High Schools are being targeted and even junior high students.

            E.        Why is debt so wide spread? Because firms make a lot of money from the interest charged.

                        1.         Debt is the only product where customers come to the firm begging for the privilege of purchasing the product.

            F.        The general principle is not to leave an obligation - Romans 13:8

II.        Is borrowing wrong?

                        1.         In the context it is talking about obligations to the government for taxes

                        2.         But in verse 8 it is generalized to all men

                        3.         The idea is not necessarily no debt, but not to incur debt that you cannot pay. Why?

                                    a.         To take without repayment is harming the lender. It is a form of stealing - Psalm 37:21

                                    b.         It becomes a form of slavery to the lender - Proverbs 22:7

                                                (1)       Your choices become limited

                                                (2)       Or as Deuteronomy 28:44 put it, you end up following the lender’s lead.

                                    c.         It is a form of lying. You made a promise that you did not kept.

            B.        Only purchase what you can pay for - Proverbs 22:27

                        1.         Do not put necessities up as collateral. If you can’t afford to lose it, don’t use it for a loan.

                        2.         Under the Old Law, an Israelite was not allowed to promise (borrow) what he was not able to pay - Ecclesiastes 5:5

                                    a.         “Oh, I’m not promising God. I just promised the bank.”

                                    b.         Under the New Testament, a Christian’s word is his bond - Matthew 5:34-37

                        3.         Michelle Singletary, quoting her grandmother 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 your don’t have it today, you’ll have it tomorrow?”

            C.        Even borrowing with the ability to repay can be dangerous.

                        1.         Usually we borrow figuring that at our present income level, we can make the payments.

                        2.         But that is assuming you know your future income is steady or going to rise.

                        3.         The future is not guaranteed - James 4:13-14

                                    a.         What happens if you get laid off.

                                    b.         Now all risks may not be covered, but you should make reasonable attempts. After all, you gave your word.

            D.        Debt is payment to the wrong people - Proverbs 22:16

            E.        In reality borrowing is a means of lowering your future standard of living.

                        1.         Let’s say I have $2000 in the bank and I want to buy a car.

                                    a.         I could buy an $22,000 new car with $2,000 down financed for 5 years at 8%.

                                                (1)       The payments would be $405 per month

                                                (2)       At the end of 3 years I would have a 3-year-old used car that I still owed $8, 966.

                                                (3)       Most likely I would owe more than the car is worth.

                                    b.         Or, I could buy a clunker now for $2,000.

                                                (1)       Assuming I only put $300 away each month because it was a clunker and needed frequent repairs

                                                (2)       At the end of three years, I would have a car that might be only worth $1,000, but I have $11,493 in the bank (at 4%)

                                                (3)       You know you could buy a fairly nice used car for $12,000

                        2.         Choice A is borrowing against the future, so in the future there is less money in your pocket

                        3.         Choice B is living within your means now so that you have more in the future.

                        4.         What happens is that A continues to reduce his net worth, while B continues to increase his net worth.

                        5.         Which is more reasonable?

            F.        The Scriptures solidly teach against cosigning loans (guaranteeing a loan made to someone else)

                        1.         Proverbs 17:18 - You don’t understand what you have done

                        2.         A cosigner is 100% obligated for the payment of the loan, yet receives nothing from the loan. How smart is that?

                        3.         Proverbs 22:26-27 - If you can’t afford it, don’t buy it. If your friend can’t afford it, why put your personal possessions at risk?

                        4.         You won’t like it - Proverbs 11:15

                        5.         Only loan what you can live without - Luke 6:34-35

                                    a.         In cosigning, you are loaning money to someone for which you will receive no benefit in the use or interest in the repayment.

III.       Why do people borrow?

            A.        They want what others have

                        1.         Not because necessarily need the item, but they don’t want to appear behind the times or fashions

                        2.         It is worldly desires instead of sensible living - Titus 2:12

                        3.         In other words, it plays to personal indulgence.

            B.        They want to speed things up

                        1.         Trying to purchase items before they can’t afford them - Proverbs 21:5

                        2.         In other words, it plays to discontent - I Timothy 6:6-8

                        3.         It is a sign of poor planning. It caters to the impulse buyer.

                        4.         It is a recorded fact that consumers spend 25% more when they use credit than when they use cash. There is a visual feedback that doesn’t come with credit.

            C.        “I need to establish credit”

                        1.         If by this you mean you need to establish a history so that you can get reasonable rates to purchase a home that you know you can pay, perhaps it is reasonable.

                        2.         But often, once the feel of “easy” money comes in, people have a hard time stopping.

                        3.         Instead of establishing credit, they eventually establish that they are credit risks. - Proverbs 22:1

                                    a.         Over extending yourself is ruining your reputation

                        4.         If you have a need, and it usually isn’t, only borrow what you firmly know you can pay off. (In other words, you have money in the bank to back it up.)

            D.        “I need it for travel”

                        1.         Use a debit card or a collateralized credit card.

            E.        “I can write it off my taxes”

                        1.         Let’s see. Suppose my interest payment was 6% and my tax rate was 25%. I borrow $100,000 to purchase a home.

                                    a.         In the first year, I will have paid 5966.59 in interest, which can be deducted.

                                    b.         That will translate into $1491.65 less to the government. It only cost me $5966.59 for the privilege.

                                    c.         None of us want to pay extra taxes, but if you are getting or keeping a loan sole for the tax write-off, your being had.

                        2.         Mortgage deductions do mean you have an effective reduction in your annual interest rate, but you are still paying money out. You are still borrowing from your future.

IV.      What if I made a mistake? I’m owe too much.

            A.        Stop contributing to the problem - Proverbs 22:3

                        1.         It is amazing how many people see that they are on the wrong path, but they continue to walk it.

                        2.         Cut up the cards. That will stop you from using them.

            B.        Live within your means. That is going to take planning and a budget.

            C.        Keep your word

                        1.         You made the debt. It is your obligation to repay it, even if it was stupidity on your part to do it in the first place.

            D.        If you cosigned a loan, get out of it as quickly as possible - Proverbs 6:1-5



Consumer Debt 1992 to 2001

 

 

 

 

 

 

 

 

 

 


 

New Car Purchase


Amount: $22,000

Down payment: $2,000


Loan: 60 months at 8%


Monthly payment: $405.53


At the end of three years:

Amount remaining owed: $8966.34

Amount paid: $14,599.08


At the end of five years you would have paid $26331.80 for a car that is now worth considerably less than this amount.


You’ll never get ahead. You’ll borrow money to purchase a car for the rest of your life.



Used Car Purchase


Pay $2,000 in cash

Set aside $100 per month for extra car repairs

Set aside $300 per month toward a future car purchase

(Note: you are $5 ahead per month already)


At the end of three years you would save (at 4% interest) $11,493. Your old car is probably worth $1,000.


You can then purchase a newer used car for $10,000 and still have $2,493 in the bank. And you have freed up $100 per month that is not needed for extra car repairs.


The gain continues. If you chose, within a few years you can purchase new cars for cash periodically and continue to do so for the rest of your life.