Proverbs 22:26-27 – ‘Don’t agree to guarantee another person’s debt or put up security for someone else. If you can’t pay it, even your bed will be snatched from under you.’
It is easy to purchase a lot of items today on credit. Ultimately, this means that you get the product at a time when you can’t afford it and you pay it off over a set term. This tends to cost you a lot more than if you had bought the item with your own money.
If you buy a house you may receive an interest rate of let’s say 4% per annum. Over a thirty year term, you will end up paying close to 200% interest on the sum of money you borrowed. In this regard, I think a loan is ok – your house and land generally will increase in value over time and the interest rate is low, although over a long term. If you think about it though, a $200,000 loan will cost you this as well as close to $400,000 in interest or $600,000 in total will be paid off at the end of the 30 year loan.
If you gain finance to purchase a car, chances are the interest rate will be considerably higher. On top of this, the car will devalue very quickly in the space of 12 months. In light of this, financially it may be much wiser to save up and purchase a new car or to even get one second hand that is a couple of years old. This will save you a lot of money over the longer term.
Whenever you need to buy something on credit – acquire a loan to purchase an item – it is worth considering the item itself. Will it increase in value over time? Or will it decrease in worth? This is a good way to consider what should be bought on credit.
In this regard, I think that credit cards can be dangerous. The interest rate you need to pay if the loan isn’t paid on time is high. Plus, as soon as you acquire interest, this in turn earns interest. It is very easy to get into debt this way and have to pay back so much more than you borrowed.
Wherever possible, make it a rule to only purchase on credit that which will increase in value over time – a house or land, for example. For things that will quickly decrease in value, find a way to purchase them second hand or save up until you can buy them outright without having to lock yourself into repayments with high interest. In this way, you’ll only be acquiring what is considered ‘good’ debt by investing in an asset that increases in value over time. Other than this, try to avoid the use of credit.
It is my prayer for you:
- That you will recognise that not all debt is bad, but will instead appreciate the need for a loan for investment items such as a house.
- That you will be able to recognise the value of saving for an item and buying it with cash, rather than on credit.
- That you will desire to avoid debt as much as possible and make financial choices with this in mind.
Lord I thank you that it is possible to purchase items that I wouldn’t normally be able to buy with the use of a loan. Help me to recognise good investments and to stay away from those that will only acquire me debt for an item that is of little value.
In times of plenty, don’t splurge this extra. Save a set percentage and use it to build up for times of need. If you unexpectedly come into money (like a tax refund) use it to decrease debts or increase savings.