Consumer Debt is something that we all have to deal with throughout our lives. So it is always better if you know the nitty-gritty of debt in the initial years of your career.
Since you have clicked on the link to one of my money outlined blogs, chances are you keep an interest in the financial terms. So without wasting any more time, let us first take a look at what the term debt really means.
I bet when you hear the term ‘debt,’ the first thing that comes to your mind is borrowing money. But it is not just limited to that.
Debt is basically an amount of money borrowed by an individual or an institution called a borrower from another individual or institution called the lender. There are mainly three kinds of debts on the basis of security.
- Secured Debt
- Unsecured Debt
- Revolving Debt
But apart from these three main types of debts, there is also one more kind of debt called consumer debt.
Consumer Debt 101
If you are a working individual, you have already been in consumer debt. You just did not know the term used. It is basically the sum of money borrowed by a consumer by his/her personal use and household consumption. There are many kinds of consumer debts; these range from student loans, credit card debts, auto loans, payday loans, and mortgages.
How Is Consumer Loan Availed?
There are a ton of ways that you can avail of consumer loans. However, they are mainly processed by a bank, financial institutions, or the federal government. Consumer debts can be further divided into revolving consumer debt and non-revolving consumer debt.
You can pay revolving debts at the end of each month. Revolving debts include credit card debts and EMI debts. On the other hand, though non-revolving debts are a large lump sum amount of money issued by an institution, they can be paid after a defined period of time.
School loans and auto loans are included in non-revolving loans. Now that you know what consumer debt is and how it is availed let us take a look at the advantages and disadvantages of Consumer debts.
What Is Consumer Interest?
Consumer interest is the interest rate charged on consumer debts. Consumer interest rates are usually pretty higher than mortgage interest rates. Since consumer debt is for personal use, they are non-deductible tax expenses.
Advantages And Disadvantages Of Consumer Debt
Consumer debt helps in boosting the economy as it promotes excessive consumer spendings and production. For example, students who take student loans to pursue higher education pay the loans later when they are earning well.
In simple words, when students take student loans, it is like a means to an end. The loan that a student takes is used for his/her education which allows him/her to get better-paying jobs in the future. It creates an upward course for both the individual and the economy.
Consumer debts are often deemed to be quite dismal since a high-interest rate is charged on the debt. The rate of interest is very high on credit card debts, especially when it is compared to the mortgage interest rate.
Furthermore, the things purchased on consumer debt do not have an appreciation in their values. This is why consumer debt is often frowned upon.
But keeping the advantages and disadvantages of consumer debt aside, the use of consumer debts has never been more alive. Tens of thousands of people in the US are using consumer debts.
They are using it because financial institutions are making it very easy to avail of consumer debts. In this tech-driven world, loans can be easily availed right from the palm of our hands using a mobile phone.
E-commerce stores and other online services have taken many steps to make sure that their users go into consumer debt. They often present with lucrative offers and low-interest rates.
Managing consumer debt can be a handful though, if you do not pay consumer debt monthly, then it will lead to a lower cibil score. A lower cibil score means you will face problems borrowing in the future. It is financially crushing and often affects the mental health of the consumer.
What Is Predatory Lending?
Consumer debt is seldom associated with the term ‘predatory lending.’ But what exactly is it? According to the FDIC, it is considered as the imposition of unfair and disparaging loan terms on borrowers.
These things are mainly implemented by financial institutions on those borrowers who are mainly uneducated and have little to no knowledge of debts.
Predatory lending is done the most by private financial institutions. They charge ridiculously high-interest rates, and they also take a significant amount of collateral if the borrower is unable to pay it back.
Frequently Asked Questions On Consumer Debt
These are some of the most frequently asked questions by our readers. We decided to take a minute and answer them.
What Is A Line Of Credit In Consumer Debt?
It is nothing but a borrowing limit that can be used anytime. The individual who is the borrower can take the money as required till the limit is reached. LOC is more like an arrangement that is made between a financial institution and a client that decides the amount of money a consumer can borrow.
Are Consumer Debts Fall In The Category Of Unsecured Loans?
Loans that do not require any collateral are called unsecured loans. Unsecured loans are processed based on the credibility of the borrower. Consumer loans fall under unsecured loans.
Final Thoughts On Consumer Debt
There you go; I hope now you know everything there is to know about consumer debt. I hope it has given you some insight on consumer debt and how you can avail it.
Even though consumer debts are very lucrative, you should always think twice before availing of them since they charge very high-interest rates. I am a financial advisor, and I would suggest you use Consumer debt when it is absolutely necessary.