The Right Amount of Debt

Can biblical principles help us determine how much to borrow or when to borrow? Several of the biblical foundations of finance can help. First, we inhabit God’s time-bound world with social cycles and heterogeneous individual life cycles. There is a time to borrow to invest in a growth or infrastructure opportunity which will serve customers or citizens and then there will be a time to repay debt, and those times will differ among individuals. For example, those with excess resources during a recession can bring justice and love by investing them then rather than hoarding them in cash. In terms of personal cycles, younger people generally benefit from the borrowing that the savings and lending of older people make possible.

Second, the purpose of borrowing is to obtain access to resources which can we can use to create future resources which can be used for repayment. Borrowing for education, growth opportunities, and to reduce housing costs can honor God. Borrowing as a crutch to support living above your means does not, as discussed above under “Unproductive use of proceeds.” The Bible teaches against greed of all kinds, which can include borrowing money for the wrong reasons (Luke 12:14).

Third borrowers should be reasonably certain they can fulfill their promise to repay the debt—or at least that the risks of non-repayment are understood and agreed by lenders—as an act of love. This rules out false or misleading loan applications or personal references. Borrowing today because you expect to lose your job tomorrow is unlikely to show much love to the lender, for example. Running up a credit card balance without a clear plan to repay it is no act of love, either.

Fourth, the amount borrowed should be a modest or prudent amount compared to the risks we face. How could it be loving—either to ourselves or to those who lend to us—if we routinely borrow right up to our credit limits with no cushion for unforeseen circumstances?

Biblical principles of finance apply to personal, institutional, and governmental financial decisions, although the examples above are primarily individual. In general, these principles suggest moderate levels of debt in most cases and greater use of equity for individual, corporate, and government finance. In particular, borrowers would probably not take on as much debt if they remembered that by God’s design, borrowing creates a long term mutual relationship that God intends to benefit lenders as well as borrowers. Access to debt is not our sole concern. Blessing others through our lending and borrowing is.

Offering Collateral to Get a Loan

We explore some of the biblical passages about collateral in the section, “Bankruptcy, debt forgiveness and loan modification”. The mainstream Christian view is that using your house as collateral for a loan is not contrary to biblical teaching. This view is consistent with our arguments regarding the God-intend role of finance in society. However, in light of Proverbs 22:26-27 and in light of the biblical teaching to be prudent risk takers, it seems that at a minimum lenders should not accept a house as collateral unless they are very certain that the borrower will be able to repay the loan. Similarly, according to biblical teaching, homeowners should not pledge their home as collateral unless they are very certain they will be able to repay the loan. This is in stark contrast to current lending practices in many developed countries which allow a person to get a loan which is quite large relative to their level and stability of income and relative to their history of repaying debts. With collateral there is a tendency for the lender to think “I can foreclose if need be, so I don’t need to think too hard about whether this is good for the borrower or can be repaid” and a tendency for the borrower to think, “If I cannot make my payments the bank can have the house and I’ve done no harm.” Neither party’s thinking is consistent with biblical teaching and with the God-intended role for finance as a form of justice and love.

Bankruptcy, Debt Forgiveness, and Loan Modification

The created foundations of finance include our creation as social beings who take risk and do not know what the future holds. Inevitably, this will lead to cases where the loans cannot be repaid. Thus, a loan which cannot be repaid is not necessarily a sin. Of course, a loan default may very well result from imprudent borrowing, incompetent management of affairs, hiding, or shielding income from the lender, misrepresentations to the lender when the loan was made, misrepresentations to the borrower when the loan was made, or the loan conditions that are not designed to help the borrower flourish. But in other cases, unexpected circumstances may cause a well-made loan to fail. The borrower may lose a job, incur unexpected medical bills, or suffer loss in a natural disaster, for example.

In situations like these, lenders do have an obligation to forgive the debt or modify repayment of the loan. In the Bible this takes the form of letting the borrower keep his or her collateral if it is necessary for well-being or the ability to earn a living.

If you take your neighbor’s cloak in pawn, you shall restore it before the sun goes down; for it may be your neighbor’s only clothing to use as cover; in what else shall that person sleep? (Exodus 22:26–27)

No one shall take a mill or an upper millstone in pledge, for that would be taking a life in pledge. (Deuteronomy 24:6)

When you make your neighbor a loan of any kind, you shall not go into the house to take the pledge. You shall wait outside, while the person to whom you are making the loan brings the pledge out to you. (Deuteronomy 24:10–13)

A neighbor’s cloak taken in collateral must be returned before sundown because the neighbor needs it to keep warm overnight. A millstone cannot be repossessed because that would deprive the miller of the ability to earn a living. Even valid collateral cannot be repossessed by force, e.g. entering the borrower’s house. All of these protect distressed borrowers from further calamity, even though they deprive lenders not only of the expected profit from the loan, but actually impose the loss of capital. The borrower’s circumstances are shared by the lender. This is the nature of the time-based relationship inherent in finance.

In modern economies, these protections are embodied in bankruptcy laws, which may also be known as insolvency, examination, receivership, administration, or sequestration. Generally, such laws prevent lenders from taking the necessities of life and work as payment from borrowers who default. Modern laws also prevent lenders from entering borrowers’ homes to repossess items, although they may allow officers of the law to do so. Laws also prevent borrowers from being thrown in prison for defaulting, a counter-productive and inhumane practice that was common for centuries prior to the modern age. Perhaps the development of modern bankruptcy laws represents a long-delayed fulfillment of principles embodied in the Bible in this regard.

Nonetheless borrowers should do whatever they can to repay their debts. Chewning argues, based on God’s immutability and Proverbs 6:1-5, that if we cannot pay our debts we should humble ourselves and plead with our lenders for mercy, rather than seek bankruptcy court protection from our lender.[1] Perhaps, this goes too far, given that the passages above protect distressed borrowers by God’s law, not lender’s mercy. But Chewning is surely right that the first step is for the borrower to seek the lender’s aid and counsel. As we have seen, lending is meant to create a long-term relationship between borrower and lender. Filing for bankruptcy without first attempting to work out a mutually agreeable plan with the lender is hardly the way to respect a relationship. Tiemstra urges us to treat risk as a serious matter and that borrowing is not “an easy way to make money instead of working: it is a serious expression of our responsibility before God.”[2] Finance is about serious justice and love, and when events unfold different from what a prudent lender and borrower expected, the justice and love should not cease, but indeed should be increased on both sides.