Debt marketers constantly bombard us with a message that we can “have it now”. In fact, they tell us we are “Entitled to and deserve it now!" The immediate gratification of any want is available if you are willing to give away a piece of your future. These same marketers also know a lot about you and how you are already using debt. For example, if you currently have open revolving credit card balances, debt marketers know you are probably comfortable with making monthly payments for your purchases and will target you with additional offers of more debt. Most of us at some time succumb to some form of debt marketing at least once.
Common forms of debt include:
Credit Cards - According to U.S. News research, the average APR for all credit cards is between 17% and 24%. These cards may also include a 0% APR introductory offer to lure you in.Credit cards make it easy to spend money and many people use them as a way to temporarily live beyond the provisions provided by God.
Credit Card Cash Advances – Using your credit card as an ATM debit card comes with a high cost. You may have a 0% credit card for purchases, but use it to pull cash from an ATM and the average APR is 24% on that cash advance. That loan starts immediately on withdrawal.Even if paid back at the end of your billing cycle, you will have interest on the loan to pay.
Auto Loans – Typically a four to a seven-year loan with average rates at 5% APR. Many of us have been conditioned to believe that it is normal to always have an auto loan. As soon as the loan is paid, the car is traded in for another new car and new loan. Time is never taken to save the money that is no longer being paid out, rather it is reassigned to a new loan.
Student Loans – There is much discussion surrounding the value of college education these days due to the crippling student loan debt. However, investing into yourself with a college degree in a field with high market demand makes good sense according to the 2016 Census data and the Pew Research Center. First let’s look at the benefits side of a college education. The data indicates millennials with at least a bachelor’s degree earned $20,000 more per year over those millennials not completing college. Further, Americans of all ages with a college degree reported earning $30,000 more per year than those without a degree.
Now let’s consider the cost side. Seniors from the class of 2018 are paying on their student loans an average of $371 per month for the next 10 years, per the National Association of Colleges and Employers. On average, there is a positive financial value to obtaining a college degree.If you are paying for college, the key to escaping unharmed by student loan debt is to plan ahead, budget, work while going to school and to limit loan totals to a maximum 10 year repayment period with less than 10% of your estimated annual gross income.
Payday Loans – Typically a two-week loan with an average APR of 400%. The interest rates on these loans are viewed as predatory.
Second Mortgages – These loans are backed by the equity in your home which makes them a safe bet for the lender.Average APR currently around 5%. The danger with these loans when used to pay off credit cards and similar type of debts is twofold. First, you are guaranteeing the loan with your home. Failure to pay means the lender can take your home. Credit cards are not guaranteed by your home. Secondly, research has found that if you don't address the behavior that created the credit card balances you will end up again with the high balances and now also have a second mortgage.
Home Mortgage –Typically with a home purchase you have an investment that goes up in value making it unique to other types of debt purchases which immediately drop in value after purchase. This doesn't make a mortgage a good debt but if you do take one on, consider the following to make sure you are not overextending yourself:
- Paying at least 20% down on the home to avoid needing private mortgage insurance
- Keeping it limited to 15-year terms
- Payment should be no more than 25% of your income
So what’s the harm in debt? While the Bible doesn’t indicate debt is a sin, the Bible is clear that we should avoid debt. "The borrower is a slave to the lender" (Proverbs 22:7) best describes what it means to be in debt. Being a slave in that relationship impacts your psyche and spreads into your daily life.
- Debt creates stress in relationships and money problems are a common issue found in couples divorcing.
- Financial stress from debt has also been determined to cause mild to severe health problems including depression, ulcers, migraines, and heart attacks.
- Debt takes from your future earnings.Anytime you take out a loan or charge something on your credit card you’re borrowing from the money you hope to earn in the future.
- Debt prevents you from being able to save and achieve your financial goals.
- With the burden of debt hanging over you, decisions on your career and personal life can be skewed in a way that prevents you from pursuing your dreams as you worry about making ends meet.
Debt is a slippery slope that needs to be avoided. If you are in debt and looking to get out, please join us in one of our several classes that can help you learn strategies that can change your life. Check out our Stewardship page to learn more about upcoming courses.
Written by Financial Stewardship volunteer Jon Kotrba.