Consumer debt refers to debts which individuals owe because of goods they have purchased. These goods must be consumable forms which do not appreciate in value to qualify for the designation. Having huge amounts of consumer debts is generally considered to be negative for individuals since it raises the burden on their resources to keep up with the debt servicing. It also makes it harder to remit the installment payments which are often laden with interest. When these types of debts are not well managed, they can cause a consumer to be forced into bankruptcy.
There are cases where some analysts and economists feel that a little consumer debt can benefit the individual. These scenarios mostly center on instances where the debt is run up in purchasing an asset that will increase the earning power of the individual. Several examples of this are useful to consider. One of them surrounds buying a car with financing in order to reach a job which pays more. Another might be incurring student debt to obtain a higher degree that will make it possible to secure a promotion or better job.
There are differences between this consumer debt and those that governments or businesses owe. Consumer debt is also referred to as consumer credit. This type of debt can be obtained from credit unions, commercial banks, and sometimes the United States federal government. Among the two categories of consumer debt are revolving debt and non-revolving debt.
Revolving debt is represented by credit cards. These debts are called revolving as they were originally intended to be repaid every month when the bill comes due. In practice this does not often happen, as consumers carry balances forward much of the time. Non-revolving debts are fixed installment payment loans. They are not paid off fully in a typical given month. They are more commonly held against the underlying asset’s useful life. Mortgages on homes are not considered to be consumer debt. Rather they are counted as personal forms of investment in real estate under the category of personal residential.
As of January 2017, the total debt of American consumers increased to $3.77 trillion. This represented a 2.8 percent increase over the prior month. Around $2.78 trillion of this consumer debt was comprised of non-revolving loans. It had grown by 5.5 percent. Debts on credit cards represented $995 billion at this point. This had dropped by 4.6 percent in January versus December of 2016.
There are three reasons why Americans find themselves so deeply in debt today. These are school loans, car loans, and credit cards. School loans commonly last for ten years. They can also be pushed to an over 25 year repayment schedule by extension. The federal government guarantees most of these loans since there are no assets with which to back a college degree. The rates are low to encourage higher education. During the Great Recession, these loan defaults skyrocketed as the loans increased massively with many people who were unemployed “going back to school” to improve their prospects. The Affordable Care Act gave the Federal government authority to take over this national student loan program from Sallie Mae, the private company which previously administered it.
Car loans typically run from three to five years, which is considered to be the safe collateral life of the new vehicle. After this point, the value of these cars depreciates so highly that they are no longer considered to be valuable collateral. Banks simply repossess the vehicle if the borrowers default on the payment schedule. There are more of these loans now thanks to the low interest rates which encourage borrowing to buy vehicles.
Finally, credit card debt soared because of the Bankruptcy Protection Act of 2005. People could no longer easily declare bankruptcy, so they were forced to run up their credit cards in an effort to pay bills, especially healthcare. In July of 2008, the credit card debt peaked at its historic high of $1.028 trillion. This amounted to a per household average of $8,640.