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MONEY MATTERS

Good debt vs bad debt

/ 11:53 PM January 12, 2012

Question: As a financial planner and a Christian, what are your views on the following verse: “Poor people are slaves of the rich. Borrow money and you are the lender’s slave” (Proverbs 22:7, GNT). Do you differentiate between ‘good’ vs ‘bad’ debts’?–Junella Alutaya via e-mail

Answer: This is probably one of the most perplexing questions asked of me and I feel that it is not I but my pastors who should answer. Nonetheless, let me give my opinion on the subject matter.

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There has always been a great debate on debt and there’s even a popular view on good debts vs bad debts.

Personally, I don’t think of debt as good vs bad, rather I look at it as bad vs worse. Today’s society has accepted the fact that debt is part of our lives and there is no way to live our lives without it. For many years, I subscribed to the popular belief and look at debt as a means to obtain my aspirations. However, debt is something we can actually do without or at least minimize. The biggest regrets in my adult life were mostly about getting in debt and if there will be a ‘do-over’ in life, I would live one without it.

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There are some debts that are not as bad as the others and, as a financial planner, these debts are something that we can live with, although it is something we should get out of as soon as we can. Such debts are home amortization and certain business debts like credit lines from suppliers. Everyone deserves a home and buying it in cash is quite difficult for most of us so I am making an exception for home loans. However, if you should get a housing loan, I recommend that you maximize your equity (down payment) so you can reduce your interest expense. The interest paid in home loans, though lower than most other loans, can be substantial since mortgages are spread over many years. I once heard from someone that he will only get a home loan when he already has a minimum of 50 percent equity—that guy understands his mathematics. Some credit terms from suppliers for business are all right provided the interest levied is not horrific. While many suppliers do not add interest charges in their credit terms, one can ascertain the cost of borrowing by offering to pay in cash and ask for discount. The discount is in essence the interest being paid for the credit term. Some businessmen have so much trade payables that they are dangerously standing on thin ice; being over-leveraged is a recipe for disaster. A sudden business change can cause bankruptcy.

As to worse debts, they are our usual fare of consumer loans led by the monster of all debts: credit card debt followed by personal loans. Why? Because they charge such onerous interest rates. The worst thing you can do is pay the minimum in your credit card balances. Once you do that, it will take you decades to repay your debt. Informal loans, especially those offered by loan sharks, are beyond worse as the interest you pay for them can reach to 200 to 300 percent a year.

While we can’t avoid some debts like home loans, we should be miles away from debts. There’s nothing wrong with credit cards, in fact they can be very convenient. However, borrowing through credit cards is really unwise in my book.

My friend Chinkee Tan once told me that while slavery was the bondage of yesteryears, today’s bondage is debt. Being in debt is like being in bondage and it deprives us from being totally free as we are beholden to our obligations. While debt is not a sin, the Bible has nothing positive to say about it. The Bible always refers to borrowing as foolish. People may find my view on debt idealistic and even naïve but whenever I see debt-free people, I can tell you they are happier. Personally, I can’t wait for the time that I will be debt-free and as the Lord permits, it should be soon.

No longer will I believe that lie that debt is necessary and not bad. “Owe nothing to anyone, except for your obligation to love one another. If you love your neighbor, you will fulfill the requirements of God’s law.”–Romans 13:8, NLT.

I hope my opinion helps.

(Randell Tiongson is an advocate of life and personal finance. He is a director of the Registered Financial Planner Institute (Phils.) and has over 20 years’ experience in the financial services industry. For questions, write to randell@randelltiongson.com. To read his personal finance blogs, visit http://www.randelltiongson.com.)

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