Is Going Into Debt Wrong?

Common Debt

Most Americans have some form of debt. The majority of homeowners take out mortgages and make monthly payments on their homes. Other common forms of consumer debt include auto loans, lines of credit and credit cards. In a sense, even monthly utility bills are a form of debt as companies give consumers services on credit, expecting them to pay later.

Although creditors are supposed to examine your ability to repay them when deciding on a loan or line of credit, you also need to assess yourself. Entering into debt that you don't believe you can pay, can be viewed as unethical. The term "credit" means trust. When you enter into a debt agreement, you have an ethical obligation to act in good faith and take on only as much debt as you can uphold.

When businesses need capital to fuel their growth and pursue opportunities, they have two main options: debt and equity. A business can either sell shares of ownership to investors who then yield a percentage of the resulting profits, or take out loans. As a result, companies of all sizes -- from small proprietorships to multinational corporations -- frequently have some amount of debt. The same generally goes for individuals who invest in themselves and their futures through student loans that help increase their human capital and therefore increase what they can command in the labor market.

Although debt itself isn't wrong, getting in over your head can be. When making lending decisions, financial institutions look at the debt-to-equity ratios of business and individuals alike. For companies this means the value of their assets and revenues compared to their amount of debt. For individuals, it's assets and income compared to outstanding debt. Lenders want to see that applicants are not getting in over their heads in debt. Examining your debt-to-income or equity ratio is an important part of doing the right thing when looking into debt.