People often resort to loans when they want to have something they cannot pay for in full. It puts them in debt until they can repay it, and the asset becomes theirs. A great example is using a credit card for a large appliance purchase. This is called consumer debt.
Consumer debt is the use of a loan for people to acquire assets at the expense of their credit. The premise of consumer debts is that the borrower can finance assets and own them. How many people avail this? How do you manage these debts, and what happens when you don’t?
Here is some vital information about consumer debt in the US, its statistics, its effects, and how to manage it as a borrower.
Consumer Debt is how much you owe lenders for the service they offer you, whatever it may be. Depending on the loan you take, the price and the interest rates vary, but it’s something you need to pay off until you have covered the full price plus interest.
Four types of consumer debt are the most common in the US. These are credit card debts, mortgages, auto loan debts, and student loans.
Credit Card Debts
Credit cards are handy. This rectangular card made of plastic and metal is issued by a financial institution, and allows the user to borrow money when needed. This can be used with merchants that allow cards as a form of payment.
A mortgage is a type of loan to finance a property, usually liveable space like a part of land or houses. The deal will often span for 15-30 years, depending on the price of the property. It is a secured loan that uses said property as collateral if the borrower cannot repay the money.
Auto loans involve the financing of vehicles. Like mortgages, it is also a secured loan, with the borrowed vehicle being the collateral. The price and interest rates rely on the vehicle you finance, and the monthly installments will typically take years.
Student loans are perhaps one of the first loans many Americans will use. These debts involve payment for tertiary education expenses such as tuition, books, and other important fees. The interest rate and the means of repayment will depend on the lender.
Statistics on Consumer Debt
There has been an increase in consumer loans in the US. According to Statista, as of June 2020, there is a total of 14.3 trillion dollars of debt. The type of loan that took most of the said debt was a mortgage, with over 9.78 trillion dollars. Following it are student loans at 1.54 trillion, auto loans at 1.34 trillion, and credit cards at 0.41 trillion.
What contributes to this is the number of people in the US that have loans. 80% of Americans are in debt. Among the different age groups, generation x, or people born between 1965 to 1980, have the most debt. 9 out of 10 gen x-ers have loans. Older generations, like baby boomers, have loans even in retirement.
Effects of Consumer Debt
There are positive and negative sides to consumer debt, and it can vary depending on a borrower’s circumstances. Whether loans are good or not is subjective, but if taken correctly, they can help people.
Consumer debt, on the positive side, helps the economy. This is because paying off the debt is a way of customer spending and can help grow production in a certain way. Additionally, having a loan reinforces a balance of spending and saving money.
Loans or the loan’s product can be beneficial in the long run if used properly. Students take out student loans, for example, because they know that education will lead to better financial standing that will help them pay the loan back. Compare student loan rates from different lenders to see which one is right for you
On the other hand, there are also negative sides to consumer debt, but this is all conditional, which means it will only happen if borrowers cannot meet certain terms. One of the negative effects is that you might be dragged into a cycle of debt, meaning if you can no longer pay your debt, then you might be forced to get another debt to pay it.
Another consequence of not paying your debts depends on whether you have a secured or an unsecured loan. If you have a secured loan, your assets will be seized as collateral. If you have an unsecured loan, your credit score will drop, as the lenders will report to major credit bureaus.
How to Control your Debt
Do not let the negative effects of debt intimidate you. Loans transacted with the right lender and with the right conditions will help you immensely as long as you know and are prepared to manage your loans.
Evaluate your money. Check if you have the means of repaying your potential loan before you get one. Make sure you have enough money to pay for it monthly. Once you think you are financially capable of paying debt, begin to budget your expenses. Save a portion for the monthly payment without neglecting the expenses to your basic needs.
Lastly, limit your spending. Only spend on something you need; avoid unnecessary things that you will not use or need daily. It helps you save additional money for other needs such as emergencies.
Consumer debt is big in the US, which is not necessarily a good or a bad thing. Loans are transactions that can readily help borrowers, hence the huge demographic. It will leave a good or bad effect depending on how you deal with it. If you need a loan, always prepare and manage your finances, so you can benefit from the loan and make the most of what you spend.