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My Thoughts on Debt

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I received a comment the other day about choosing to go into debt again. It was prompted because I discussed the possibility of a car loan. I thought I would reply in a post because it brings up a good point to make on how I feel about debt.

When it comes to debt, I am not anti-debt. Do I like being in debt? Heck no. Especially since it was due to us being irresponsible and spending more than we made. While I’d love to blame the credit card companies for our debt…I can’t. They didn’t make me use their cards. I did that. I swiped it each time or plugged the numbers into the computer to make an online purchase. They didn’t do that. Sure, they have questionable practices. You miss a payment and your interest rate can skyrocket. I don’t agree with their business practices and I think they are shady. I’ve always felt that if I concentrated on that and gave them the blame – we wouldn’t learn our lesson. So I’ve focused on the fact that we used the cards when we didn’t have to.

When it comes to student loan debt, I’m not against that either. Tuition and room and board can be expensive. To have that money up front at 18 can be hard. I probably could have taken out less in student loan money if I saved some money while working the summer before college. I didn’t. I spent it and because of that I took out more in student loans than I had to. So I don’t regret all of the student loans I took out.

For mortgage debt, given our income it would be tough to purchase a house mortgage-free. So I am not anti-mortgage debt. It would take us many years to do that. I think the thing to do is to still try to get the best deal when shopping for a mortgage and to not buy more home than you can comfortably afford.

Lastly, for auto loan debt, I am not against that either. I don’t want another auto loan, but I also don’t want to make a mistake of buying an inexpensive used vehicle. The last one we bought was such a horrible vehicle – it only lasted a few months. Like with a mortgage, you still have to be responsible and understand what you are getting into with an auto loan and the car you are purchasing.

I don’t want to have debt. But I have to be realistic and responsible. I bolded responsible there because I think it sums up the one thing we lacked for so many years. We weren’t very responsible with our purchases. We settled on a high mortgage interest rate because we thought it was the best we could do (although we didn’t agree to an ARM that was offered to us – whew!). Same goes for our last car loan. The interest was high, but it was the first auto loan we got without a co-signer so we took it. Thank goodness we agreed to the five year loan versus the 6 year that was dangled in front of us.

We’ve made bad choices in the past. We have learned a lot and with that knowledge are going to make the best out of the money we make and spend. We may not be able to have the best scenario (no debt at all), but we will make the best choice given all of the resources we have. We will be smarter consumers. We are shifting our finances to be more proactive than reactive.

Such is the case with saving up for a new car (which doesn’t necessarily mean brand new – just new to us). Our car probably has many years left to it. It’s a darn good car and although I really didn’t like that car at first, I have a lot of respect for it now. We will start saving up the money for our next car purchase. Here is where my realistic tendencies come in (some may say pessimistic, but I view it as realistic in this case). What happens if our car has to be replaced sooner than expected? We can settle for a cheap used car using funds saved up until that point, but that is not always the best choice.

Our goal is to make the best choices given all of the resources we have. We also want to get to the point where we have more resources since that gives us more options. After being so far in the hole, I feel I am being realistic with even hinting at the possibility of another auto loan. When faced with a problem, I like to look at all of the choices and not exclude any unless it is determined that it is not the best choice. I will not avoid debt if it ends up being the best choice for the situation.

We are actually going through this process right now due to some substantial upcoming medical costs that are not covered by our health insurance. We could pay in full and deplete our savings. We could enter into a payment agreement with the medical provider and have medical debt. We could research to see if there are any programs we can qualify for to help with the cost – maybe even get new health insurance. Etc., etc. We could even decide to not have the medical cost at all (it is not life-threatening, but does affect quality of life). There are many choices we can make and we will dig into each one to determine the best choice given the resources we have.

Going deeper into debt is not an option I like, but it is an option that I have chosen to keep as an option until it is determined to not be the best choice.


30 Comments

  • Reply Nelson |

    I am not anti-debt either. What I am is anti-evil-banks and the majority of the bad banks are the big banks, the ones that are being bailed-out or have been bought-out (like Washington Mutual).

    I have a credit card in the 5% interest range with no late fees or over the limit fees and a few other goodies. I value my relationship with my current bank. My bank representative actually emails me and makes sure I am happy customer, a far cry from the rude employees of the big banks.

    The number one lesson I take from my debt experience is to know who to go into debt with.

  • Reply Rob in Madrid |

    Please, enough of the moralizing, I get soooo tired of bloggers blaming the public while letting the banks off the hook. Over the last 20 years the consumer protection laws have been tilted firmly against the consumer, but you’d never know that by reading your typical FL blog. Outside of credit matters blog I never hear rants against banks and CC companies or payday loans.

    here’s a few good places to start
    CC companies evil tricks

    When Banks turn Evil

    I’d suggust spending some time here as well

    /www.creditmattersblog.com

    I’d love to hear PF bloggers taking the companies to task for what amounts to leglized fraud.

  • Reply Rob in Madrid |

    Don’t take my above comment personally I’ve been following your blog long enough to now you’re responsible.

  • Reply Tricia |

    Rob – no offense taken. I do have a different view, because I have not experienced many of their bad practices first hand. I’ve only heard about things that they do. So for me to rant would be tough since I have not lived it first hand. If I had been burned, I’m sure my view would be affected.

  • Reply MrsMoney |

    I agree with your way of thinking. I recently had to take out a car loan when my 14 year old car died. I feel a lot of guilt about it. I feel like I should still be driving that clunker even though I can afford the used car I got. My thinking was as long as I got a car I could afford I would be responsible. That’s what it’s all about! Great post.

  • Reply dasha |

    I agree with you. Sometimes it is necessary to take on debt to make a capital investment that will make you more productive, efficient or significantly more comfortable. This is why school loans, mortgages and car loans are ok- as long as they are undertaken responsibly. Debt is only a problem when it results from a cash flow issue and is therefore a symptom of a bigger problem. I think you are on the completely right track.

    Good luck with the medical issues!

  • Reply emmi |

    dasha covered the investment side of going into debt (like student loans) but there is also the minimum liquidity side. I think it is perfectly reasonable that when it comes time to buy a car, and you have cash for it (or a chunk of it) but to use it all would leave you with insufficient emergency funds, then you should take out a loan, and put yourself on an accelerated repayment plan that leaves you the option of paying less to keep your cash position in line ongoing.

    Like you said, responsible is the concept here. And full awareness of the total interest costs (a big lacking people have with cc debt. honestly, if the rules changed to better force each statement to illuminate the total interest impact of various payment amounts, fewer people could be in denial).

    It’s too bad about the medical issues. Depending on what the procedure is, waiting can result in a more effective treatment later, because the medicine moves so fast. Also, if it is very expensive, you might look into medical tourism, where you go to cheaper country (New Zealand, India, etc) for the treatment and even with travel expenses, come out ahead. Just a thought. Really depends on the procedure.

    Also, just in case you haven’t thought of it, you probably qualify for a medical savings account, so if you are planning on doing this, make sure you maximize your tax advantage too by putting enough money in it to pay for it pre-tax.

  • Reply Another Reader |

    If I were in your shoes, I woulld not consider a car loan or any other debt until you have paid off all your credit cards AND your student loans. You have a ways to go when you add the student loans to your debt.

    However, you need to stop focusing on the debt and start focusing on increasing your income. You have made a start with your husband’s current full time employment. Although you haven’t mentioned it recently, I assume you are still working at the new business to increase its revenues and profits. If you can increase your net income sufficiently, all these other issues will become irrelevant.

    With regard to the medical issue, if it involves a hospital, sit down with the business office beforehand and try to negotiate a price for those things not covered by insurance. It’s easier than trying to negotiate after they charge you full retail for what is not covered by insurance. Save up and pay cash up front for your portion since the work is elective. Use the same approach with the doctors who will be involved.

  • Reply tlange |

    Why would anyone go into debt on things that do not appreciate in value.

    Houses – normally appreciate in value
    Education – having one will sometimes bring greater opportunities and a better paycheck

    Cars – depreciate in value… need I say more

    I do not like debt, but if I had to, I would have debt on things that appreciated instead of depreciating.

  • Reply MVP |

    I wouldn’t go into debt for a car. I’ve been where you are, and it’s just not worth it. You can get a decent car for only a few thousand, which you can save up over a few months. Once you’re out of debt, you can save up cash for a more expensive used car in no time.

  • Reply Abigail |

    While I hope to not have to go in debt for a car, I think the most important aspect about going into debt is whether you’re thinking things through.

    So long as you have clearly thought out the alternatives, only you can decide, in the end, what is right for you. True, you’re blessed with having a choice in such matters, compared to medical bills or other instances.

    But just because you can avoid debt doesn’t always mean it’s the best route. My knee-jerk reaction tends to be anti-debt, but there are always exceptions to that rule.

    My husband couldn’t eat solid food anymore, after 28 years of steroids for severe eczema blasted his teeth. It’s a bit more of an emergency than a nicer car, but it was still a decision we had to sit down and make.

    In the end, we went with a much more expensive option, since the dentistry school refused to put him under (only local sedation… for extracting the roots of more than 20 teeth!!!) and to get the dentures from a dentist who he really trusted. (Also, with all the free adjustments and helpful service she has since given us, she has more than made up for the price gap.)

    There will probably always be a way to get something cheaper or to avoid going into debt. In the end, your major responsibility is to look at all the options, weigh the pluses and minuses, and figure out what works for you.

  • Reply Jay |

    Of the last 4 cars I have bought, 3 were brand new and one was a program car. When we bought the program car it had about 13,000 miles on it but was about $8,000-$9,000 less than what we would have paid for a brand new one.

    We drove that car until it had over 160,000 miles on it. Probably the best deal I’ve had on a car.

    Since cars lose so much value in the first 10,000 miles, I really think I will go this route in the future. It still seemed like a new car with only 13,000 miles on it and it still had quite a bit of warranty left.

  • Reply Carol @ Ca Loan |

    Nice post. You write beautifully. A car is critical for mobility, but buying real estate would be even better – regardless of what some of the pundits are saying.

    I think now is the perfect time to take on good debt, and a lot of it. The market is going rebound and when it does, those who have been smart enough to invest while the market is low and prime is low will reap the benefits.

  • Reply Chitra |

    I agree its not that we want to go into debts but sometimes we have.
    Like for example in my case housing loan and car loan. In Malaysia a brand new car and the cheapest one we have can cost up to 28k. Even if I had that kind of savings I would not throw it all on a car thus apply for car loan. I don’t apply for credit cards as I feel it is the root to all evil. Even is the bank promises no annual fee and all kinds of benefits. I say NO. Really don’t want to be tempted.

  • Reply Kristina |

    I continue to see zero reason to go into debt for a car. One bad experience with a used car does not mean that most used cars will be bad. In fact, many wealthy people (Dave Ramsey included) only buy gently used cars because it’s a financially wise move in terms of avoiding immense depreciation. $5000-$10,000 can buy an amazing Civic, Accord, Taurus, etc. And a lot less money can buy a clunker that will still get the job done short-term.

    The only debt I’ll ever get is a fixed, 15 year mortgage that is a very modest percentage of my income. Sometimes a small amount of student loan debt may be justifiable, but it’s almost always avoidable if that’s a person’s priority. A part time job during the school year and a summer job equates to plenty of money to pay for a state school. Community college is very cheap and offers a chance to save to cover the last two years of college. I went to one of the top colleges in the country, paid for largely by being diligent enough to apply for grants and scholarships (plus having reasonable jobs during the school year and summer, including fun and convenient jobs like being an RA in the dorms).

    I hope that everyone will consider doing everything in their power to avoid all debt other than modest mortgages. That’s how most American’s have lived until recent decades. And can we please get rid of car debt? Why go into debt for something that drops thousands in value the second you drive it away??

  • Reply Sam |

    I’m not anti-debt at all. There’s good debt and bad debt. Credit card debt out of control is BAD debt. Student loans, car loans and home loans are good debt to me. If you find a worthy investment and need to take out a loan to pay for it AND can afford the monthly payments–that’s wonderful.

    To me, my main concern is getting my cards paid-off. Once that’s done, i’ll feel like a load has been taken off my shoulders. Even though I’ll still owe $40,000 in student loan debt, it doesn’t bother me because my education was a fantastic investment that serves me good every single year.

  • Reply Kev |

    I think you summed it up when you said it’s more about being responsible. I don’t believe that there is such thing as “good” debt and “bad” debt – debt is debt – period. The only thing good or bad about debt is how you handle it.

    I’m not anti-debt, although I wish I could be. I just finished my long struggle of getting out of credit card debt and I celebrated by doing something that seems totally ridiculous – I went back into debt by purchasing an engagement ring. I’m not worried about it though b/c there is huge difference between the debt I just paid off and the new debt I just incurred – that difference is me. The whole experience has completely changed the way I handle my finances. If I would have purchased this ring three years ago it would have been “bad” debt b/c I would have been irresponsible. It’s different now though and I can safely say that I WILL NOT be late on any payments and I WILL pay the balance off before any interest kicks in. I will handle it responsibly.

  • Reply Craig |

    No one wants to be in debt, but the 3 big ones you mentioned are common. Mortgage, student loans, and auto loans are the 3 debts that are not major things to have, assuming you can afford the payments. It’s when you get into credit card debt and start spending more than you make that get people into trouble.

  • Reply abe |

    My thoughts:

    1) Mortgage debt is ok IF it’s less than 25% of take-home pay on a 15-year mortgage

    2) Student loan debt is ok IF you go to a reasonably-priced school and have the expectation of a decent income. No $80k loans for $25k public service jobs.

    3) No car loans, ever. Fix the junker and pay cash.

    4) No credit cards, ever. Unsecured debt means you’re spending more than you make.

    All debts should be gone before a mortgage is obtained. The home purchase should involve a 20% downpayment, and the 6-month emergency fund should be fully stocked.

  • Reply emmi |

    “I think now is the perfect time to take on good debt, and a lot of it. The market is going rebound …”

    Uh, in 6 years or so, perhaps we’ll drag this trashed economy out of the dumps, and that will only be after a period of deflation that makes all debt increasingly difficult to pay off. But, yeah, other than that. Let me guess… you’re a realtor?

    “3) No car loans, ever. Fix the junker and pay cash.”

    Formerly worked in auto safety, so not a chance that would be our decision. Odds of surviving a side-impact collision from an SUV/truck when your car has no side curtain airbags: 50/50. No thanks. I’d rather live in debt than be dead or a vegetable. Side impact kills 8000 people a year and severely injures another 70,000. Interview with the crash test guy at the insurance institute discussing 2004/2005 models

  • Reply Carol @ Ca Loan |

    Emmi – hi there.

    Not a Realtor, no πŸ™‚

    When the economy tanked in 1981 there were speculators buying up Real Estate JUST after the worst was over – they made a killing within 6 years time.

    The trick to buying now is choosing the RIGHT time, and if I knew that right time I would be rich. When I say buy now that all depends on the circumstances, where the property is, and what the property is for.

    Ok….outside of that “it’s the perfect time to buy”

  • Reply Emmi |

    This isn’t 1981 (take the last digit off the national debt for one thing) Boy, if only it were. Search Google News for “wage cuts” and you’ll see that deflation is with us for real, not just temporary asset price deflation coming on end of a bubble cycle. Interest rates would have to be negative to make a loan a good loan for the time being. Getting a fixed rate loan locked in before we hit the hyperinflation the fed is so heavily trying to force on the economy to devalue our foreign debt… yeah that would be a “good loan”. But, we look more like 80s Japan than 80s America so it’s not clear we will actually get to inflationary, let alone hyperinflationary, ineffective monetary policy notwithstanding. Inflation will be a good thing and a sign of a recovery. Deflation in the meantime is going to kill everyone but the savers, who are going to get their pick of the bargains. Intentionally becoming a debtor from a saver until this next phase gets sorted out, not a good plan, because like you said, no one knows the timing on that.

    But as to house prices… look at the last 30+ years. The bottoms are flat: 3-7 years of flat. There is no need to be jumpy trying to time that one. When you start to see no change in price YoY, it’s time to shop.

  • Reply MargeM |

    I’m amazed that after all of your experiences and given how much non-credit card debt you still have that you would be willing to go into debt again (especially car debt). How can you sign up for car payments when you’re so far behind financially with retirement savings, emergency fund savings, college savings, etc?

  • Reply Tricia |

    MargeM – What if our car died tomorrow and was beyond repair? Do we deplete our small savings for a used car? Given the economy, I think we need that savings there and we should hold onto it for dear life until absolutely necessary. Too much uncertainty when it comes to employment.

    I am not saying we are getting a new car in the near future. We are running our current car into the ground. When the time comes for a new car, we’ll evaluate the situation. That could be 10 years down the road, and we may have a completely different financial picture than we do now.

    I feel I’m just being realistic in saying that all options should be considered when faced with a problem. Financing a purchase is an option.

  • Reply Colleen in MA |

    Wow, looking at these comments you have touched a nerve – debt seems to be a personal decision but the good thing is that everyone here has given a lot of thought to how they feel about it – which is the main point. I agree with your opinion as I think our situations are similar and especially like this: “Our goal is to make the best choices given all of the resources we have.” I too look forward to being debt free (will happen this year!!) and having more resources. Cash waiting to be spend VS. having choices and resources = that’s the biggest lesson I’ve learned in this journey to being debt-free.

  • Reply Carol @ Ca Loan |

    “Choices and resources” – Good one.

    Choices and resources (or liberty) are the reasons why America is what she is. The very same idea of freedom and the American Dream is what gets people in debt in the first place.

    The dream of driving a new car, owning your own home – giving your children and yourself the “things” we all want is about having choices and resources.

    What the vast majority of Americans don’t understand is that the choices and resources don’t end with spending money. The same freedom of choice and the freedom to use unlimited resources is what will get them OUT of debt.

    I don’t think most Americans truly appreciate how lucky they are to be able to have a public library where they can find information or use the Internet for free.

  • Reply David Pritchard |

    Using credit for items that don’t appreciate in value can be justified if it’s an investment. A car may fall into this category; you may need it now (for work, say), but not be in a position to pay for it now in full. However, getting into debt for consumption is, to my mind, pretty damn stupid. I know some people think this is “moralising”, but it’s not about morality, it’s about common sense. People who claim they are unable to save $100 per month often end up shelling out $200 per month, with interest, to pay off a credit card or other debt. Extremely silly.

  • Reply Carol @ Ca Loan |

    Great point David,

    I find that when I write about getting some discipline and using will-power to stop making “silly” expenditures some are offended and think I’m being preachy and as you say “Moralising”. Couldn’t be further from the truth.

    I want people to be free of stress and financial crisis.

  • Reply headknocker |

    I would add two personal opinions to this discussion. First, there is a difference between being responsible and being more responsible. The responsible thing would be to save enough money to pay cash for a quality used car, sacrificing if necessary in other areas so save the cash. Taking out a loan to buy a car is not responsible, but taking out a small loan to buy a used car is more responsible than a large loan for a new car.

    Second, anytime you are planning for the future financial events, taking on more debt should be the last option put on the table, not one of the options to take off of the table. When you give yourself permission to think of debt as an option, it becomes accepted as a ‘responsible’ decision (which it is not). Under extreme situations it may be the only option, but treating debt as a viable option is not responsible.

  • Reply Slinky |

    Debt is a tool like any other. If you don’t know what you’re doing with it, you’ve got a chance of coming out just fine and a chance of accidentally chopping your own arm off.

    Whether it’s a good idea and worth it or not…
    It really depends on what you’re using the debt for and how much you value it. Everyone has something they spend money on that other people would think is a waste. Who am I to judge if someone wants a nice car, a remodeled kitchen, their own server farm, or a concert harp?

    Personally, I would have no problem financing a really nice grand piano if I had somewhere to put it. Likewise, I have no problem financing the house to put it in. πŸ™‚

    Really, as long as you’re not financing a life style and making well thought out decisions when taking on debt, do what seems best to you.

So, what do you think ?