Consumer debt
Encyclopedia
In economics
, consumer debt is outstanding debt
of consumers, as opposed to businesses or governments. In macroeconomic
terms, it is debt which is used to fund consumption
rather than investment
. It includes debts incurred on purchase of goods that are consumable and/or do not appreciate.
In recent years, an alternative analysis
might view consumer debt as a way to increase domestic production, on the grounds that if credit is easily available, the increased demand for consumer goods should cause an increase of overall domestic production. The permanent income hypothesis
suggests that consumers take debt to smooth consumption throughout their lives, borrowing to finance expenditures (particularly housing and schooling) earlier in their lives and paying down debt during higher-earning periods.
Both domestic and international economists have supported a recent upsurge in South Korea
n consumer debt, which has helped fuel economic expansion. On the other hand, credit card debt
is almost unknown just across the sea in Japan
and China
, because of long-standing cultural taboos against personal debt. Theoretical underpinnings aside, personal debt is on the rise, particularly in the United States
and the United Kingdom
. However according to a recent report U.S. household debt is at the lowest level for 6 years.
The most common forms of consumer debt are credit card debt
, payday loan
s, and other consumer finance
, which are often at higher interest rate
s than long-term secured loan
s, such as mortgage
s. The amount of debt outstanding versus the consumer's disposable income is expressed as the consumer leverage ratio
. The interest rate charged depends on a range of factors, including the economic climate, perceived ability of the customer to repay, competitive pressures from other lenders, and the inherent structure and security of the credit product. Rates generally range from 0.25 percent above base-rate, to well into double figures. Consumer debt is also associated with Predatory lending
, although there is much debate as to what exactly constitutes predatory lending.
Long-term consumer debt is often considered fiscally
suboptimal. While some consumer items may be useful investments that justify debt (such as automobile
s, which are usually but not always exempted in discussions of consumer debt), most consumer goods are not. For example, incurring high-interest consumer debt through buying a big-screen television "now", rather than saving for it, can not usually be financially justified by the subjective benefits of having the television early. On the other hand, personal finance advisers like Robert Kiyosaki
encourage a more liberal
attitude towards taking on debt if it can be leveraged into a small business or real estate
. This higher-risk, possibly high-outcome, "personal-finances-as-a-game" attitude runs counter to the traditional mores of rising slowly through the ranks of a company through discipline and hard work, but may have increasing validity in an age of globalization.
In many countries, the ease with which individuals can accumulate consumer debt beyond their means to repay has precipitated a growth industry in debt consolidation
and credit counseling
.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, consumer debt is outstanding debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
of consumers, as opposed to businesses or governments. In macroeconomic
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
terms, it is debt which is used to fund consumption
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
rather than investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
. It includes debts incurred on purchase of goods that are consumable and/or do not appreciate.
In recent years, an alternative analysis
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
might view consumer debt as a way to increase domestic production, on the grounds that if credit is easily available, the increased demand for consumer goods should cause an increase of overall domestic production. The permanent income hypothesis
Permanent income hypothesis
The permanent income hypothesis is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term...
suggests that consumers take debt to smooth consumption throughout their lives, borrowing to finance expenditures (particularly housing and schooling) earlier in their lives and paying down debt during higher-earning periods.
Both domestic and international economists have supported a recent upsurge in South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
n consumer debt, which has helped fuel economic expansion. On the other hand, credit card debt
Credit card debt
Credit card debt is an example of unsecured consumer debt, accessed through credit cards.Debt results when a client of a credit card company purchases an item or service through the card system...
is almost unknown just across the sea in Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
and China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
, because of long-standing cultural taboos against personal debt. Theoretical underpinnings aside, personal debt is on the rise, particularly in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. However according to a recent report U.S. household debt is at the lowest level for 6 years.
The most common forms of consumer debt are credit card debt
Credit card debt
Credit card debt is an example of unsecured consumer debt, accessed through credit cards.Debt results when a client of a credit card company purchases an item or service through the card system...
, payday loan
Payday loan
A payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card...
s, and other consumer finance
Consumer finance
Alternative financial services in the United States refers to a particular type of financial service, namely sub-prime lending by non-bank financial institutions. This branch of the financial services industry is more extensive in the United States than in some other countries, because the major...
, which are often at higher interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s than long-term secured loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s, such as mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s. The amount of debt outstanding versus the consumer's disposable income is expressed as the consumer leverage ratio
Consumer leverage ratio
Consumer Leverage Ratio is a term popularized by William Jarvis and Dr. Ian C MacMillan in a series of articles in the Harvard Business Review and refers to the ratio of total household debt, as reported by the Federal Reserve System to disposable personal income, as reported by the US Department...
. The interest rate charged depends on a range of factors, including the economic climate, perceived ability of the customer to repay, competitive pressures from other lenders, and the inherent structure and security of the credit product. Rates generally range from 0.25 percent above base-rate, to well into double figures. Consumer debt is also associated with Predatory lending
Predatory lending
Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly...
, although there is much debate as to what exactly constitutes predatory lending.
Long-term consumer debt is often considered fiscally
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
suboptimal. While some consumer items may be useful investments that justify debt (such as automobile
Automobile
An automobile, autocar, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor...
s, which are usually but not always exempted in discussions of consumer debt), most consumer goods are not. For example, incurring high-interest consumer debt through buying a big-screen television "now", rather than saving for it, can not usually be financially justified by the subjective benefits of having the television early. On the other hand, personal finance advisers like Robert Kiyosaki
Robert Kiyosaki
Robert Toru Kiyosaki, born April 8, 1947) is an American investor, businessman, self-help author and motivational speaker. Kiyosaki is best known for his Rich Dad Poor Dad series of motivational books and other material published under the Rich Dad brand. He has written 15 books which have combined...
encourage a more liberal
Economic liberalism
Economic liberalism is the ideological belief in giving all people economic freedom, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and...
attitude towards taking on debt if it can be leveraged into a small business or real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
. This higher-risk, possibly high-outcome, "personal-finances-as-a-game" attitude runs counter to the traditional mores of rising slowly through the ranks of a company through discipline and hard work, but may have increasing validity in an age of globalization.
In many countries, the ease with which individuals can accumulate consumer debt beyond their means to repay has precipitated a growth industry in debt consolidation
Debt consolidation
Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan....
and credit counseling
Credit counseling
Credit counseling is a process that involves offering education to consumers about how to avoid incurring debts that cannot be repaid through establishing an effective Debt Management Plan and Budget...
.
See also
- ConsumerismConsumerismConsumerism is a social and economic order that is based on the systematic creation and fostering of a desire to purchase goods and services in ever greater amounts. The term is often associated with criticisms of consumption starting with Thorstein Veblen...
- Consumer Leverage RatioConsumer leverage ratioConsumer Leverage Ratio is a term popularized by William Jarvis and Dr. Ian C MacMillan in a series of articles in the Harvard Business Review and refers to the ratio of total household debt, as reported by the Federal Reserve System to disposable personal income, as reported by the US Department...
- Predatory lendingPredatory lendingPredatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly...
- Consumer credit riskConsumer credit riskThe following article is based on UK market, other countries may differ.Consumer Credit Risk is the risk of loss due to a customer's non re-payment on a consumer credit product, such as a mortgage, unsecured personal loan, credit card, overdraft etc .-Consumer Credit Risk...