Monday, May 09, 2005

Debt Myths

There is a lot of thinking being passed around as "common sense" that iscompletely wrong. It is all part of our indoctrination into being a "good"consumer and spending more. Just because something is repeated a lot does not make it true. , a pretty common sense guy, busts those mythsin his book "The Total Money Makeover."

One myth is that debt gives poor people economic opportunity, so making credit available to them is important. While that is partly based in truth. It is used to justify lending to a risky group at high interest rates and fees. These days, the poor are dragged into courts and stripped of everything to pay a debt, after a predatory lender has provided them with "economic opportunity". It happens to middle-class families as well. (Deuteronomy 28:12,13) Borrowing is a curse, and so is not being able to pay it back. (Psalm 37:21)

Another myth is that we have an obligation to help family members or friends if they need a loan. The truth is that these kinds of loans can ruin relationshipsthat would have otherwise been fine. When you loan to someone, you make them your servant, and they become your slave. A better way to do this is make interest free loans, but if they are unable to pay - forgive the loan. However, it is imperative that you use good judgement when lending. Unless they need the loan for food, clothing, or shelter, you probably aren't helping them. They also need to show indications that they have a plan in place to pay the loan back, and be more productive in the future. This goes for providing personal guarantees on loans for them as well. If you do that, you'd better be ready to pay the loan yourself. (Proverbs 22:7; Hebrews 13:5; Proverbs 6:1-5)

A common myth is that you will always need to borrow to buy a car. Wrong! You can buy a reliable one used for cash, and drive it for many years. Some people are attracted to the tax advantages of leasing. The truth is that is the most expensive way to buy a car, even after tax benefits. (1 Timothy 6:6,8)

The worst myth out there is that credit cards can help you build good credit. In reality those pieces of plastic are fraught with legal and financial traps that can ruin you.You don't even have to make late payments for that to happen. Habakkuk 1:4 shows us an example of not taking our commitments seriously. Credit card agreements make it nearly impossible to prevent default on your commitment, since you don't have direct control over the terms of default, that can change without your knowledge if the change of terms is lost in the mail.

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