Credit has become the foundation of North American commerce. Credit has even become the foundation of our very economy. Our consumption based economy, driven by consumer demand, driven in turn by corporate marketing, relies on a buy cycle. People often state, sarcastically, that things aren’t made as good as they used to be. Truth is; they’re not. Companies of all kinds rely on consumers to buy new things or versions of their products every 3 years, or less. This isn’t crazy conspiracy speaking either. You can find evidence of this being taught in economics classes everywhere. Economics is supply and demand. In order to maintain a flow of supply you must have steady demand. Modern marketing drives artificial demand through cheap “accessible” items and need-it-now marketing. Find me an advertising campaign that isn’t telling you that you need the newest/need to upgrade, and I’ll show you one that’s failing.
Behind our insatiable desire for stuff is the credit system. Our financial systems love nothing more than to lend us money. Well, they love one thing more; charging us obscenely to borrow that money. Loans have infiltrated every single form of consumer spending. You can buy almost any product on the shelves today on some kind of payment system. Every store offers branded credit cards that even let you buy groceries on credit. The allure of new things for a meager monthly amount has a strong draw. I know because it gets me every time. Now loans on big ticket items have gotten longer, and use increased payment frequency to flash tantalizingly low numbers across your screen.
Here’s the problem: credit isn’t money. Anything you buy with credit you don’t own. Until that loan is paid off, and it can be as long as 15 years now, your beloved consumer item is owned, wholly or in part, by our friends the bank. You also pay dearly to have that item. Large purchase loans carry 5-7% interest numbers, while store payment plans sometimes top 20%. Basically that means you’re automatically paying 7-20% more for that item than if you paid cash, right off the bat. Loan numbers are calculated after tax; ouch. Many things devalue much faster than their loan decreases, particularly for things that are financed 100%. A recent study showed that Canadians’ debt now exceeds 150% of their annual income. Not even the United States, whose trillions in debt we like to scoff at, has a ratio anywhere near that high.
But some debt seems necessary, needed even. Let’s take cars for example. New cars, particularly larger vehicles like minivans and trucks, are awfully expensive. Making a cash purchase amounts to saving as much as $60,000. Putting that kind of cash aside is essentially impossible for any family who owns a home in a middle class income. Certainly not within a time frame reasonable enough to replace existing vehicles. This is something I’m struggling with right now. How much debt is OK, and is any kind of debt good?
Financial advocates argue debt is OK. Consumer debt, they say, within managed levels is acceptable for families. Vehicle loans are no longer categorized as consumer debt but, in a weird twist, now considered assets by many banks. Other financial leaders, like Dave Ramsey, oppose debts of any kind, and in any form. To him taking a loan for any kind of purchase is tapping into a childish sense of entitlement. Debt repayment, and avoidance, are pillars of the Dave Ramsey philosophy. Even the bible weighs in on debt, though modern economics wouldn’t agree with it. Interestingly, Proverbs 22:7 sums up today’s economic environment rather hauntingly: “The rich rules over the poor, and the borrow is servant to the lender.” Seems pretty clear.
Brings us around full circle to the debate I struggle with. Our long time van is due for replacement this year. Our home’s windows are in dire need of replacement. Our bathtub is in such a state it’s embarrassing. We have no free cash savings to solve any of these pressing issues in the foreseeable future, but all require resolutions much sooner than later. We could take out a loan to buy a car, but that would be monthly payments for 5 years. 5 years is a long time to be in obligation to somebody over a used van. We could take payment plans out on window installations, or put our bathroom on a line of credit. Both these scenarios could give us immediate results, and savings in one case, but the dread of monthly payments, and obligation. I’m torn internally between reaching a resolution now, and justifying the debt, or waiting and saving, which could take years. Proponents for credit will argue that all, particularly the home renovations, are sound financial decisions, and easily worth financing due to their wealth increasing potential. Those who oppose credit would simply point out that anything worth having is worth working for. The feeling of reward and satisfaction after building up savings to make the purchase can be a massive physiological boost.
Our family, thanks largely to the insistence and discipline of my wife, is nearly free of consumer debt. We have no car payments, and just recently took five years off our mortgage. Making the right financial choices are critical to us, but what the right ones seem vague. What do you think of using credit? Are we all just digging a hole we can never emerge from? Or are planned, thought-out financed decisions OK?
Either way it’s making my noodle hurt.