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General Bible Courses > Living by the Book > Finances by the Book

Chapter 2: A Scriptural View of Debt

Chapter Goals/Competencies:

  • Learn and use compounding to your advantage
  • Avoid falling into financial traps.
  • Follow important criteria for undertaking debt
  • Test the merit of any financial undertaking.

The Nature of Debt

   Chapter Goals/Competencies:

  • Learn and use compounding to your advantage
  • Avoid falling into financial traps.
  • Follow important criteria for undertaking debt
  • Test the merit of any financial undertaking.

Key Scripture: "The rich rule over the poor, and the borrower is servant to the lender."  Proverbs 22:7

The Deception of Debt

Remaining debt-free in a society that encourages spending has become increasingly difficult. The majority of Americans go into debt a little at a time. Before they realize what has happened, their payments have expanded to gargantuan proportions, their paycheck has shrunk, and monstrous debt looms over everything—demanding to be fed. Even the government’s deficit spending reflects the debt problem at the heart of many Americans.

The media has been prominent in helping Americans "meet their every need." As a result, many people have fallen prey to advertisements. It is important to remember, however, that these promises are always geared to serve the advertiser, not the consumer. Advertising plays on a person’s susceptibility to temptation, a need for significance, a desire for instant gratification, and a hope to get a "good deal." While a product or service may make you feel good temporarily, not one of them can ever meet the deepest needs of your life.

Another part of the problem of easy debt is the misconceptions that are often encouraged by some financial experts regarding the use of debt. Some of these misconceptions are:

1. Borrowed money is always paid back in the future with cheaper dollars.

This is true if two basic assumptions prevail. The first is that you can borrow at a fixed rate so your interest rate will not increase with inflation; the second assumption is that inflation will continue. But counteracting these assumptions is the reality of a fluctuating economy. In periods of inflation, interest rates rise, and lenders promote adjustable rate mortgages. A lender can change points and fees to increase his own income, pushing much of the risks to the borrower. So while you may repay the loan with cheaper dollars in the future, the premium rates of interest will cost you more than any benefits you may receive.

2. All your tax interest is deductible. 

Not all interest is one hundred percent tax deductible. Consumer interest (credit cards, car loans, installment loans) is certainly not, and investment interest has some limitations. The only exception is a home mortgage loan, but even that has limitations over certain amounts. It is important to remember also that taxes are not offset dollar for dollar by the amount of interest. A partial benefit on tax deductions is actually all that interest may offer.

3. It will cost more later.
This statement should evoke the question, "Do I really need it?" You cannot assume that prices will continue to rise. Making a purchase on the basis of its future cost is a very short-term perspective and may prove to be a financial disaster.

4. Make the magic of leverage work for you. 
The idea is that using debt to purchase gives a far greater return than if you paid cash. During inflationary times many people (even huge lending institutions) have gone bankrupt trying to make leverage work for them.

The Magic of Compounding

Compounding has been called the eighth wonder of the world because it changes a single dollar saved for the future into multiplied dollars. It does not work dollar per dollar or arithmetically; rather compounding works geometrically. So the earlier you start saving the greatest amount at the highest interest rate, the greater the final product of compounding.

An excellent example of compounding is the effect of impulse spending over a long period of time. If you spent $2.74 a day on things you did not plan for or did not really need, you would spend a phenomenal $40,000 over a working lifetime of forty years. That $40,000 placed in an IRA at 12.5 percent interest would grow to $1,000,000 in the same forty-year period.

If you think of the $2.74 as interest paid on borrowed money, the $2.74 spent each day on interest does not cost you only $40,000. In actuality, you will have paid the lender $1,000,000. The opportunity cost of consumption states that if you spend today, you give up multiple dollars out of the future. Spending $1000 each year unnecessarily actually costs you the earnings on that $1000 each year—approximately $1,000,000 over a lifetime.

Compounding can work for or against you, depending on your status as a lender (saver) or a borrower. The adverse effects of compounding can best be demonstrated by the following example: If you have a thirty-year mortgage on your home at a 10 percent interest rate, you will actually pay back over three times the original amount borrowed.

Borrowed $100,000

Interest rate 10%

Monthly payment $ 877.57

Months paid x 360

Total paid $315,925

To reduce this high-interest cost, many financial planners encourage homeowners to make extra mortgage payments if they are able. Biweekly payments instead of monthly payments or simply making an extra monthly payment each year will reduce home mortgage interest costs by tens of thousands of dollars. Carefully review these charts on compounding.

Debt Misconceptions

Some very common misconceptions concerning debt are:

It’s a sin to borrow. Although the Bible gives many warnings about being in debt, borrowing money does not violate any commandment. However, Scripture clearly indicates that borrowing is not God’s financial ideal. "Trust in the Lord with all your heart and lean not on your own understanding" (Prov. 3:5).

It’s wise to borrow. Many Christians believe that leverage (using a small amount of equity or assets to purchase an asset worth substantially more) is the way to prosperity. But the Bible warns against using debt to accomplish economic goals. "If you lack the means to pay, your very bed will be snatched from under you" (Prov. 22:27).

God will bail you out of debt. God does not promise to overcome the results of your unwise behavior. Instead, he allows you to live with the consequences of natural laws when you violate them. "I will repay them according to their deeds and the work of their hands" (Jer. 25:14).

Debt is an exercise in faith. God does not need a lender to meet our needs. This is a presumption on God and not an act of faith. "So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the pagans run after all these things, and your heavenly Father knows that you need them" (Matt. 6:31-32).

It’s a sin to loan money. Although it is not a sin to loan money, the relationship between the borrower and the lender greatly changes. If you are considering loaning money, first determine if the need is legitimate (shelter, food, clothes). If it is and you can afford it, give the person the money. "You must not lend him money at interest or sell him food at a profit" (Lev. 25:37). If you cannot afford an outright gift, reconsider the matter seriously before making a loan.

Life Application:
what are your long-term financial goals? Prayerfully consider your answers as you fill in Worksheet 2-A, "Long-Term Goals." Add other categories that may be your personal financial goals.

Biblical Principles of Borrowing

Key Scripture:  "Keep your lives free from the love of money and be content with what you have because God has said, ‘Never will I leave you; never will I forsake you'"- Hebrews 13:5

Besides the warnings against presuming upon the future and denying God an opportunity to work, there are many other biblical principles relative to debt and borrowing.

You should calculate the long-term cost. "Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it?" (Luke 14:28).

Owing money to someone often hinders your ability to love that person. "Let no debt remain outstanding, except the continuing debt to love one another, for he who loves his fellowman has fulfilled the law" (Rom. 13:8).

You become a slave to your lender. "The rich rule over the poor, and the borrower is servant to the lender" (Prov. 22:7).

By taking on debt, you run the risk of not providing for your own. "If anyone does not provide for his relatives, and especially for his immediate family, he has denied the faith and is worse than an unbeliever" (1 Tim. 5:8).

Beware and be on guard against any form of greed. "Watch out! Be on your guard against all kinds of greed; a man’s life does not consist in the abundance of his possessions" (Luke 12:15).

Debt can be defined in many ways, but simply stated, it is money owed to anyone for anything. However, debt is not a sin. Although its use is discouraged by Scripture, it is not prohibited. Debt is often the symptom of a much deeper spiritual problem; therefore, the root problem must be dealt with first.

Four common causes of problem debt are:
1. A lack of discipline.
 "He who ignores discipline comes to poverty and shame, but whoever heeds correction is honored" (Prov. 13:18).
2. A lack of contentment. "Keep your lives free from the love of money and be content with what you have" (Heb. 13:5).
3. A search for security. "His heart is secure, he will have no fear" (Ps. 112:8).
4. A search for significance. "He who pursues righteousness and love finds life, prosperity and honor" (Prov. 21:21).

Warnings Against Borrowing

Getting into debt is a lot easier than getting out. Easy credit, low payments, and advertising illusions all promote foolish financial decisions. The current marketplace wisdom says, "Raise your standard of living by buying what you want, and pay for it while you enjoy it." But compounding always works against you. The resulting debt mortgages your future and sentences you to a lower standard of living. It may even deprive your family of the necessities of life.

Debt robs you of freedom of choice because it becomes the first priority in your life. From the banker’s point of view, payments come before tithing, taxes, a college education for your children, even food on your table. In addition, debt is always paid back after-tax dollars.

The five kinds of debt are (1) mortgage, (2) consumer [or installment], (3) credit card, (4) business, and (5) investment. Before going into debt in any of these areas, you should use four criteria for making your decision. It is especially important to utilize them when considering a home mortgage.

Economic. Is the after-tax return greater than the after-tax cost? For example, will the appreciation on your home be greater than the cost? And do you have a guaranteed way to repay?

Psychological. Do you have peace of mind? A home mortgage, for instance, may be a source of great stress, especially to a woman. How much stress can you handle?

Unity. You and your spouse should be in agreement concerning this important decision. The value of unity in the home is always greater than that of any loan.

Spiritual. Do you have freedom before God to take on this debt? What personal goals and values are you meeting with this debt that can’t be met in any other way?

Credit Cards

Credit is extended to you because you are supposedly creditworthy. But when you use that credit, you are in reality borrowing money. When you charge (or borrow) so much money that you cannot repay it, you are in debt. Credit cards make it possible to go deeply into debt without even realizing it. People typically get into trouble with credit card debt because they fall victim to one or more popular misconceptions about credit cards.

Misconceptions about credit cards:

You can’t live without them. Credit cards are often used for temporal and depreciating items such as entertainment. One way to avoid using a credit card unwisely is to never make an impulse purchase. Instead, wait twenty-four hours to make sure you really need the item.

Having a credit card means you are creditworthy. Credit card companies are more interested in their high interest rates and fees than in your credit worthiness. They can afford to take on some significant losses if you should not prove to be credit worthy.

You establish a credit rating by using a credit card. Credit bureaus often serve as clearinghouses for personal credit histories. However, a potential lender uses several sources to check your credit rating. The best way to establish a good credit history is to pay all your bills on time and to maintain checking and savings accounts at your local bank.

All interest is equal. If you borrow $1000 at 12 percent interest with the full amount due at the end of the year, you would pay a total of $1,120. You have used the money for a whole year for only $120. However, if you pay back the loan at a monthly rate of $93.33, you will still pay back $1,120. But you will essentially be paying 12 percent on $500 for six months of the year because you have not had the use of the $1000 for a whole year. Each month your principle has been reduced, but you are still paying on the full amount of $1000. Interest charges and interest rates are often two entirely different things.

Using credit cards—which always have a high interest rate—to buy items that depreciate never makes sense. Credit cards can be used without going into debt only if you begin with a spending plan. Consider using a debit card rather than a charge card and always pay the full balance at the end of the month. Even then, it has been found that a credit card encourages the purchase of more goods and services—up to 34 percent more. To prove that you can save by using cash only, put your credit cards away for at least six months. If you already have a living expense standpoint, you can develop a strategy for repaying your obligations. Once you have decided how much you can pay back each month, go directly to your creditors and show them how you plan to repay them. Be sure to pay something on each debt every month so that each creditor knows you are serious.

To buy a car, furniture, or other depreciating items using installment debt is never a wise decision, because even a low-interest loan has a cost hidden somewhere. If you can't afford to save for it, you can't afford to borrow for it. If the money is available to make payments the money is also available to be saved. All you have to do is delay buying the item.

As far as a business debt is concerned, a couple in unity can prevent needless risks. Men, who are usually greater risk-takers, often overlook possible financial dangers. On the other hand, women who usually possess an uncanny intuition can sense a hidden risk. If a deal sounds too good to be true, it probably is. Truly successful people still become well-off the old-fashioned way--they earn it. The key to financial success is to spend less than you earn and to do it for a long time. There are no shortcuts. Remember, financial (and spiritual) maturity is giving up today's desires for the future's benefits.

How to Get Out of Debt

If you are in debt, the first question to ask is, "Why am I in this situation?" Determining the reason can facilitate your getting out. The major requirement for getting out of debt is discipline. You get out debt the same way you got in -- a little at a time. The most formidable aspect is that it almost always requires a change in lifestyle and the reordering of priorities. Unfortunately, there is no easy or painless way to get out of debt. But with your family's cooperation, you can pay the price now to enjoy freedom from financial bondage later.

If you should choose not to pay off debts gradually, you do have the alternative of selling assets(a house, boat, or car) or somehow generating more income. Additional money might be raised through your spouse working (this alternative may be more expensive in the long run), by obtaining a second job, or by asking your teenagers to work. Whichever option you choose, you will experience a definite change in lifestyle, for you must give up either your time or your possessions.

The following four sites will help you get out of debt:

Step 1. Determine where you are. 
Using Worksheet 2-B "Debt Schedule," determine the total amount of money you owe. List all credit card balances, installment loan balances, mortgage balances, and term note balances, along with the terms of repayment for each loan. Do not list regularly monthly expenses for utilities, school tuition, food, or clothing.

After completing the worksheet, you now have two spiritual requirements. If anything comes to mind regarding our debt for which you need to be forgiven, confess it and ask God to forgive you. "If we confess our sins, he is faithful and just and will forgive us our sins and purify us from all unrighteousness" (1 John 1:9). Be sure to thank God for forgiving you, and as an exercise of faith, give thanks to him for working on your behalf. "Be joyful always; pray continually; give thanks in all circumstances, for this is God's will for you in Christ Jesus" (1 Thess. 5: 16-18).

Step 2. Stop going into debt.
You must decide to borrow no longer for any purpose. If the temptation is too great, stay out of shopping malls and close your credit card accounts. Learn to say "No" to sales pitches, especially those on the telephone. Many companies offer free items or demonstrations (some in your own home), "with no strings attached." But look out for the hook hidden somewhere. If you don't watch such demonstration, you will never realize how much you really "need" the product.

Step 3. Develop a repayment plan.
In Chapter 1 you completed the "Living Expenses" summary and "Your Cash Flow Analysis Summary" worksheets. Now that you know your situation from a debt, cash flow, and living expenses standpoint, you can develop a strategy for repaying your obligations. Once you have decided how much you can pay back each month, go directly to your creditors and show them how you plan to repay them. Be sure to pay something on each debt every month so that each creditor knows you are serious.

Do’s of debt repayment (consider a combination for your situation)

• Do sell assets of either small or large items.

• Do use your savings accounts; do not use your emergency funds.

• Do make double payments to reduce the principal quickly.

• Do keep your payments constant. Pay off smaller debts first and keep paying the same amount on remaining debts.

• Do reduce your living expenses; 30-40 percent of every family budget can be used to repay debt.

• Do reduce your tax withholdings by determining your tax liability for the year. Decrease your withholdings to no more than that amount and use the extra take-home pay to decrease your debt.

Don’ts of debt repayment

• Don’t decrease your giving. "Honor the Lord with your wealth, with the firstfruits of all your crops; then your barns will be filled to overflowing, and your vats will brim over with new wine" (Prov. 3:9- 10).

• Don’t use tax money. "Give to Caesar what is Caesar’s, and to God what is God’s" (Matt. 22:21).

• Don’t use a debt consolidation loan unless suggested by a financial counselor.

• Don’t seek a second full-time income; extra income tends to raise the level of discontent. Most debt problems are spending, not income, problems.

• Don’t go it alone; consider counseling for both you and your spouse.

• Don’t wait for your "ship to come in" or depend on lottery tickets or bingo prizes to relieve your indebtedness. Gambling of any kind can become addictive. Rather than bailing you out, it will drag you down to total poverty. The odds are always against you, and the Lord is not honored by the lifestyle promoted by gambling.

Step 4. Establish accountability. 
The principle of accountability is seen throughout Scripture. Choose a person or a couple to whom you are accountable for your financial decisions—those who are trustworthy and will confront you, if necessary. Of course, the individuals to whom you are accountable must have proven themselves capable stewards of their own finances. "For lack of guidance a nation falls, but many advisers make victory sure" (Prov. 11:14).

You are now ready to take an action step toward getting out of debt. Using the suggestions made in this lesson, fill out Worksheet 2-C, "Action Plan for Getting Out of Debt."

Much of the material in this chapter has been adapted from The Debt Squeeze by Ron Blue (Focus on the Family Publishing, Pomona, CA 1989). This volume includes many other examples and charts as well as a more complete discussion of the debt problem. In it, Ron offers the expert advice of a financial counselor in lay terms in an easy-to-read format.

Life Application: See the "Vulnerability of Stress Scale." Count the number of units you have accumulated this past year. How many of the factors are related to your finances? Can you see how money management touches almost every area of your life? Determine to change those things that are in your power. As far as the other things are concerned, "do not be anxious about anything, but in everything, by prayer and petition, with thanksgiving, present your requests to God" (Phil. 4:6).

Audio Teachings

Take the quiz

Quiz Instructions

Review Questions

1. A common misconception is that "borrowed money is always paid back with .................... dollars in the future.

Cheaper

More

2. Most tax interest ............. deductible.

Is

Is Not

3. Dollars can be multiplied at a phenomenal rate by ...................... .

Diminishing

Compounding

Lessening

4. One danger of debt is that compounding works ................... you.

For

Against

5. A ........................ lifestyle is a huge economic mistake.

Consumptive

Giving

Saving

Conservative

6. ....................... tend to buy cars and investments responsively.

Men

Women

7. The longer a car is driven, the more expensive it is to operate.

True

False

8. A lack of discipline and ....................... are two common causes of problem of debt.

Ideas

Borrowing

Contentment

9. Debt is always paid back with after-tax dollars.

True

False

10. The after-tax return should be greater than the after-tax .....................

Cost

Interest

11. The five kinds of debt are: credit card, consumer, mortgage, investment, and ....................... .

Personal

Vehicle

Virtual

Business

12. Being in unity with your ....................... is necessary before undertaking a debt.

Spouse

Banker

13. Denying God an opportunity to act on your behalf is a ..................... danger of borrowing.

Virtual

Spiritual

Financial

14. When we borrow money, we often put the ................ in the place of God.

Interest rate

Lender

Borrower

15. A prerequisite of borrowing should be guaranteed way to repay.

True

False

16. Cutting down on your .................... expenses puts money directly into the cash flow margin.

Living

Bank's

17. By having a ........................ plan prepared at the beginning of each year, you can avoid the use of debt.

Borrowing

Credit

Financial

18. In debt repayment, concentrate on paying off the .................. debt first.

Largest

Smallest

19. Tithing is no more or less spiritual than debt repayment.

True

False

20. It is possible to greatly decrease your living expenses by using cash rather than ............... .

Checks

Debit cards

Credit cards

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