In economics, consumer debt refers to the total amount owed on purchases of consumable items. It includes debts on purchase of durable goods and/or fail to appreciate. In international monetary terms, it is specifically debt that is used to finance consumption instead of investment. This form of debt is unique in that it normally takes the form of a loan that has to be repaid with a sum of money that you already have in your possession. It is often called “secured debt” because its purpose is to serve as collateral for future credit.
Most of us understand that consumer debt consists of personal loans and mortgages. The more common forms of consumer debt are credit cards, automobile loans, store accounts, and auto title loans. When shopping for credit, many consumers overlook the possibility of using their home as collateral. However, if a consumer has equity in his home, he can often use it to secure an auto loan or other type of consumer debt. Many times, home equity lenders are able to provide low interest rates and longer repayment periods.
When comparing debt levels, it’s important to examine the relationship between debt and consumer leverage. The consumer leverage ratio is a calculation based on current debt and the value of a stock portfolio. It is meant to provide lenders with an estimate of the likelihood of repayment of a given amount of debt. These ratios, which can be found online, were developed by financial institutions to help them evaluate the risk of lending to particular individuals and various types of debt.
A high consumer leverage ratio is seen as a sign of financial irresponsibility. As debt levels rise, so do the rates. Lenders also tend to raise their rates for higher-risk borrowers. As a result, many Americans are trapped in a vicious cycle of debt. High interest rates coupled with predatory lending create an environment that makes it difficult for consumers to keep up with their payments.
Because of the complex web of interest rates and repayment options, the consumer debt crisis is much more than a simple problem of rising prices. It has become a complex mesh of factors that can only be fully understood through an accurate assessment of its causes. In general, predatory lending appears when a lender increases the interest rate charged to a borrower based solely on his or her credit score. Non-revolving debt like credit cards carry a higher interest rate because they are not usually subject to a standardized interest rate formula. Some credit card companies may base their rate on the applicant’s credit score and employment history, while others may rely on subjective factors like age and income level.
Because many consumers have varying credit scores and may fall into varying categories, understanding what consumer debt consists of can be complicated. Non-revolving debt, such as auto loans, fall into two basic categories: secured and unsecured. Secured consumer debt consists of auto loans and home equity loans. Non-secured consumer debt, such as credit cards, store cards, catalogues, and personal loans, fall into two general categories: revolving debt and non-revolving debt.
With non-revolving debt, the consumer pays for goods or services on a month-to-month basis. This type of debt is known as revolving debt, because the consumer is in agreement with the lender about the repayment plan. For example, a consumer may make a monthly payment to a credit card company for thirty dollars and then use the same card to make a purchase of a dollar-dollar item, at which point the amount is withdrawn from the card. If the consumer decides to use another card to make a purchase at a different store, the cash advance will be applied from the new card and the process will continue until the balance is paid off in full. For the consumer who has an interest rate on a non-revolving debt, however, this is not the case. Because these types of consumer debt are typically for larger purchases, the interest rates are often higher than the interest rates on revolving debt.
As mentioned earlier, many consumers find themselves with high interest rates on both secured and unsecured consumer debt. This may be due to a number of factors, the most important of which are credit history, employment, and income level. In addition to the high interest rates, many consumers find that the monthly payments on their revolving debt are difficult to make on their own. In this case, they seek the assistance of a consumer credit counseling agency. Using the services of a counseling agency, a representative helps the consumer to negotiate payment plans with their creditors.