The Ethics of Debt

With every economic crisis the first to suffer financially are usually those whose situation has been weakened by debt. Low levels of debt provide immunity to adverse conditions so that personal financial crisis can be averted.

 Taking on debt is a bit like taking laxatives – a small amount makes life go more smoothly, but too much can leave you in the proverbial! The best way to avoid an overdose of debt is to start out in life without it. There are many instances of young people loading themselves up with debt as soon as they start their working life on the premise that future earnings will pay for their present lifestyle. Generation Y are comfortable with debt because of their optimistic outlook on life and blissful ignorance of the consequences of paying interest on money borrowed.

 I was impressed, however, to be told recently by an eighteen year-old keen to buy her first car that she wants to save up for it rather than get a loan because she doesn’t want to be in debt for the rest of her life! Buying a first car using borrowed funds can indeed be the end of a debt free life. By the time the loan is repaid, the car has dropped in value and needs replacing. Making loan repayments means it is hard to save and so more money needs to be borrowed to buy another car. It’s the start of a vicious cycle of debt that indeed can last a lifetime. Over that lifetime the interest paid on funds borrowed would be enough to buy any eighteen year-old a dream car.

 It is not only the interest on debt that creates a problem; it is also the fact that debt imposes a commitment to pay that must be honoured regardless of your financial circumstances. Debt repayment is not something that can be done only when you have funds to spare. By contrast, if you start regular savings for something you want to buy rather than going into debt, you can cut back on your savings if money becomes tight.

 Economists analysing the current economic crisis are of the view that high levels of personal debt in the world’s major economies are at the root of our present troubles. Debt has weakened our resilience to economic shocks, and unpaid debts have ultimately led to the demise of what were once rock-solid financial institutions. Who is to blame for this sad situation? We have a society that ranks people by the number and quality of their material possessions, an impatient generation that lives beyond its means, and lenders who have greedily spotted an opportunity to increase profits by dishing out debt to those who can least afford it. The result is a growing class of people who are victims of debt, trapped by high levels of financial commitment that make it impossible to save and get ahead, and suffering extreme psychological as well as financial stress. Whatever happened to social responsibility? While individuals choose to take on debt, society has a role to protect those who are vulnerable to pressure from peers and the temptations of easy credit. Legislation and regulation can offer some protection, but it is ethical behaviour on the part of lenders that will provide the solution.