golden dollars and globe symbol on balance

Leverage and Debt

In financial terms, leverage acts as a multiplier. It allows an individual to purchase or invest in more by borrowing. In the mechanical world, leverage can produce powerful effects. Archimedes once said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

worldlever

In terms of a home mortgage, envision that your monthly payments as the small force being applied to one end of a lever. That small amount of cash can produce enough lift (cash from the bank) to purchase your home.

If levers are a powerful device in the mechanical world and used to leverage purchases in the financial world, why is debt often frowned upon in Christian circles?

The rich rule over the poor, and the borrower is slave to the lender.  Proverbs 22:7 NIV

Let’s consider this verse in terms of the lever analogy. Who or what is the lever in this analogy? The answer: Your life becomes the lever. You promise to either pay off the loan or make payments for the next 15, 20 or 30 years of your life.

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If you lead a stable life and if the payments are manageable, purchasing a home by leveraging it with a loan may indeed make sense. However, you are now obligated to the bank for potentially 30 years of payments. Your freedom becomes limited.

The borrower to some extent becomes a servant or slave to the lender. Think of a waiter or waitress. If you eat out, the waitress is your servant. She will fetch water when you want it, come by and insure all is well or return your food if it’s not prepared correctly.  She is committed to serving you.  When receiving a loan you become committed to serving it. You will serve it month after month, year after year, regardless of the situation. If you’ve been sick, lost your job, or have had other unexpected expenses, you still need to come up with the cash to pay the loan every month.   This commitment limits an individual’s ability to make choices that might lower their income.   Why would anyone ever chose to take a pay cut?  I’ve known folks who have for the reasons below:

  • Serving as a missionary.
  • Helping a sick or disabled parent or child for a prolonged period.
  • Find a different but lower paying job that is more in line with your calling or talents.

Many other potential reasons exist. Remember, the larger the monthly payment and the longer the term, the greater degree you are in bondage to your lender.

Modern well-built homes are often a sound investment. They are apt to go up in value, but could go down as many have discovered in the past 5 to 10 years. However, today many people use debt / leverage to make purchases that retain little or any value. An example would be using an equity line of credit to purchase a vacation or taking a seven-year loan on an automobile.

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Many families have several loans that they have used to leverage purchases. Those could be a home mortgage, home equity loan, car loan, and credit card loans. Our lives are the levers that are doing all this lifting. What happens when too much leverage is used?

HomeAndMoreSnapLever

The life of the borrower becomes stressed. When people or systems are over-stressed, small mishaps, bumps or grinds are magnified. As a result, they get upset and often take it out on those they live with. Children and loved ones are often hurt. Read the short story Snap, one of several contemporary parables in the Christian devotional  ‘Modern Parables For Financial Freedom’.  It will give you a fresh perspective on this issue.

Eliminating and avoiding as much debt as possible will help to set you free. When borrowing money, realize you are potentially making a commitment for the full term of your loan. Be sure to leave margin in your budget for savings and emergencies. This isn’t always easy to do, but is necessary for financial freedom and peace of mind.

Consider one of the programs or books below to help educate you so that you’ll avoid financial mistakes or help you get out of the financial problem you might already be in.

Crown Ministries or Financial Peace

See:  Financial Peace Revisited in Amazon for a good book.

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