HOME

TheInfoList



OR:

In
economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...
, consumer debt is the amount owed by consumers (as opposed to amounts owed by businesses or governments). It includes debts incurred on purchase of goods that are consumable and/or do not appreciate. In
macroeconomic Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/ GDP ...
terms, it is debt which is used to fund consumption rather than
investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
. The most common forms of consumer debt are credit card debt, payday loans, student loans and other consumer finance, which are often at higher
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
s than long-term secured
loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...
s, such as
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
s. Long-term consumer debt is often considered fiscally suboptimal. While some consumer items such as automobiles may be marketed as having high levels of utility that justify incurring short-term 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, cannot usually be financially justified by the subjective benefits of having the television early. In many countries, the ease with which individuals can accumulate consumer debt beyond their means to repay has led to a growth in the debt consolidation industry and credit counseling. Debt also leads to a lower
credit score A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bu ...
and may have effects on mental health. The amount of debt outstanding versus the consumer's disposable income is expressed as the consumer leverage ratio. On a monthly basis, this debt ratio is advised to be no more than 20 percent of an individual's take-home pay. 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 refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 20 ...
, although there is much debate as to what exactly constitutes predatory lending. 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 in overall domestic production. The
permanent income hypothesis The permanent income hypothesis (PIH) is a model in the field of economics to explain the consumption function, formation of consumption patterns. It suggests consumption patterns are formed from future expectations and consumption smoothing. The ...
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. Personal debt is on the rise, particularly in the United States and the United Kingdom. According to the US
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
's 2024 statistics, the US household debt service ratio was at its lowest level since its peak in the Fall of 2007 in 2021, but has since risen.


Debt-to-GDP ratio, consumer leverage ratio

A country's private debt can be measured as a ' debt-to-GDP ratio', which is the total outstanding private debt of its residents divided by that nation's annual GDP. A variant is the consumer leverage ratio, which is the ratio of debt to personal income.


List of countries


See also

*
Consumerism Consumerism is a socio-cultural and economic phenomenon that is typical of industrialized societies. It is characterized by the continuous acquisition of goods and services in ever-increasing quantities. In contemporary consumer society, the ...
* Consumer credit risk * Household debt


Further reading

* - a freely available guide to managing consumer debt, aimed at consumers


References


External links

* Current rates from the World Bank
U.S. consumer credit outstanding

In-depth reports on debt and borrowing in the United Kingdom
{{Consumer behaviour Debt Financial economics Consumption (macroeconomics)