Debt is a Trap

Not all debt is bad, but all debt is a risk

Benjamin Franklin once said that he’d “Rather go to bed supperless, than rise in debt”. Now I’m not all that clued up on the history of Ben Franklin, did he have a rich family and subsequently become the heir to a fortune? When he was talking about debt, did he mean all debt or would he have been happy with a mortgage? Whatever his further thoughts on the subject might have been, it does seem that not everyone agrees with his philosophy.

I’ve read a lot of posts in the blogosphere recently on the subject of debt and whether some debt is good debt and some debt is bad. After reading all of these posts I finished up thinking pretty much the same way that I did when started to read, that being that not all debt is bad debt but that all debt is certainly a risk. The two biggest areas that people have been plugging as ‘good debt’ – namely mortgage debt and business debt – can turn out to be just that under the right circumstances, on other occasions though even so-called ‘good debt’ can prove to be a curse and ruin a person’s life for years to come. Today we’re looking at mortgage debt.

The Property Winners

Over the years there have been many people who have made a lot of money from their properties and not from investing in a large scale way but simply by taking a mortgage out and buying a property. They likely bought at the right time, at the right interest rate and may have been fortunate enough never to have found themselves out of work or fallen seriously ill during their tenure, meaning that paying back that debt didn’t ever really put a strain on their finances. These people would almost certainly tell you that mortgage debt is good debt and that the best thing you can do in life would be to get on the housing ladder as soon as possible, so you make that your life goal.

The Close Encounter Group

Then we have another group of people, the close encounter group. These people may not have had such an easy experience with their mortgage having perhaps bought at the wrong time, fallen victim to redundancies at work, or suffered a serious illness at some point in their life making their mortgage payments less than comfortable for a considerable amount of time and causing them a considerable amount of stress to boot. Fortunately they managed to work through the situation or things in their life improved at just the right time and they managed to keep a hold of their property, pay it off and live happily ever after. This group of people will probably still feel that mortgage debt is good debt and would still recommend buying your own home but they may also throw a few cautionary notes in with their recommendation as to the dangers of what can happen and the stress you can be placed under if life decides to turn against you for a while.

The Victims of Mortgage Debt

Then we have a final group of people, the victims of mortgage debt. We’ve seen countless people fall victim to mortgage debt in recent years after being caught up in the subprime crisis. These people bought at the wrong time, for the wrong price and borrowed more than they could afford in an effort not to see the dream of property ownership slip out of reach for good. Soon they realised that they couldn’t afford their mortgage payments, house prices were dropping, they were losing their jobs and many of them then lost their homes after months or sometimes even years of dealing with the untold stresses of worrying about where – considering their credit score was now ruined – they and their families were going to end up after their home was taken from them.

These people would probably tell you that  mortgage debt is to be avoided at all cost or at least given SERIOUS consideration before going anywhere near it. For these people mortgage debt turned out to be seriously bad debt and not always because of circumstances that were under their control, what I mean by that is that yes you should really be able to work out whether you can afford to make the mortgage payments or not, but it’s sometimes difficult to predict your own redundancy or an economic and housing crash to rival the great depression occurring not long after you get the keys to your first home. These people may also feel that they would have been in a better position to react to the economic downturn and alter their outgoings by moving to a cheaper rental had they been renting, rather than a home owner unable to sell due to a lack of buyers and negative equity. This may also have resulted in them preserving their credit score for when houses quickly became much cheaper to buy.

All Debt is a Risk

So is all debt, bad debt then? In certain circumstances and under the right economic conditions I’d say not, many people have made a lot of money by borrowing money to buy a home. What is clear though is that all debt is risky and it is just as easy to become a victim of mortgage debt as it is to be a property winner. We started this post with a quote from Benjamin Franklin so we’ll end with another quote that I heard when I was young – “Debt is only a problem if you can’t afford to service it”. The problem is that you never really know what life or the economy may have in store for you and if things do go against you and you suddenly can’t afford to service it, well then you’ll soon see the wisdom in Ben Franklin’s philosophy of avoiding debt completely.

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7 Responses to Not all debt is bad, but all debt is a risk

  1. All life is about change. All change involves risk. You can’t avoid risk, you just have to insure against it. The interesting question to me, is how do you insure against a risk like a once in a 100 year financial meltdown, like the one we just had. You would have said that it was not a risk worth insuring against because the probability of it happening was so small. I would have agreed with you. One way to avoid risk is to avoid debt. But even without debt I was left shattered. I’m not sure where that leaves me now vis a vis my feelings about debt.
    Brad @ Hot to Save Money recently posted..How To Avoid DebtMy Profile

    • Adam Buller says:

      Hey Brad, yeah I’m not quite sure how you insure against a financial meltdown like the one we had unless you can really see it coming, even then we’d probably deny that it could happen again. Sorry to hear you got hit by the crash. I’m definitely not saying that people should avoid buying a house just because it’s a risk though, I suppose I just wanted to get across that just because something falls into the category of possible ‘good debt’ that doesn’t mean that it can’t quickly turn into a huge financial mistake.

  2. Last week me and my hubs are planning to loan in his bank to finance to our planning business. But I told him that I don’t have a courage enough to agree with him. I’m afraid of debt, I have many “what if’s” on my mind.
    Clarisse @ Make Money Your Way recently posted..An Unconventional Approach to Buy and HoldMy Profile

  3. I can’t decide if we’re in the close encounters group or the victims group. We definitely bought a house at the wrong time, and when we needed to move three years after we’d bought it we ended up not being able to sell it. We’ve now been renting it (but unfortunately losing money) every month since then. We are planning to list it for sale again next month and we’re told that the market is much better there now than it was two years ago… but we’ll find out. You’re very correct that all debt is a risk.

  4. Great title! I don’t agree with those that would say that all debt is bad. Lending money allows a person to accomplish something they couldn’t, or would be very hard pressed to be able to otherwise. Mortgage is a good example. You can save for years and years to pay for a home in cash – but at the same time you STILL have to pay a housing cost of some sort. But, as you pointed out, every debt is a risk…there’s a chance I could get laid off, or that the housing prices could drop and I’m left owing more than my house is worth. Which is why even though lending money can be a useful tool, it’s ALWAYS in your best interest to pay it off as soon as possible.
    Brock @cleverdude recently posted..Increase Your Budget Accuracy by Breaking Down The Definition of GroceriesMy Profile

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