Consumer Debt

Consumer debt consists of debts that are owed as a result of purchasing goods that are consumable and/or do not appreciate. Consumer debt is often used alongside household debt as both are often connected with credit cards, mortgages, auto loans, and payday loans. It should be noted, however, that home mortgages are personal investments.

A key difference between consumer debt and other forms of debt (e.g. corporate secured debt) is that consumer debt is typically used for consumption and not investment or doing business. It is the amount owed by individual consumers, in contrast with that of businesses or governments.

The most common instances of consumer debt include credit card debt, payday loans, and other consumer finance. These forms often exist at higher interest rates, compared with long-term secured loans, such as mortgages.

Consumer loans can be borrowed from a bank, credit union, and/or the federal government in the form of credit cards (revolving, to be paid off monthly) or fixed-payment loans (non-revolving, usually held for the life of the underlying asset). 

The consumer leverage ratio (CLR) measures the amount of debt the average American consumer holds, compared with his or her disposable income. The formula is as follows:

Consumer Leverage Ratio = Total household debt / Disposable personal income

Total household debt is derived from the Federal Reserve’s report, while disposable personal income is reported by the US Department of Commerce, Bureau of Economic Analysis. The CLR has been used as a litmus for the health of the U.S. economy, along with indicators, such as the stock market, inventory levels, and the unemployment rate.

On an individual level, the consumer leverage ratio is advised to be no more than 20 percent of an one's take-home pay. Long-term consumer debt is usually considered fiscally suboptimal, particularly as most consumer goods (e.g. a new flat screen television) do not have high levels of utility that justify incurring short-term debt.

Consumer debt is often associated with predatory lending, broadly defined by the FDIC as “imposing unfair and abusive loan terms on borrowers." Predatory lending often targets groups with less access to and understanding of more traditional forms of financing. Predatory lenders can charge unreasonably high interest rates and require significant collateral in the likely event a borrower defaults.

In August 2017, consumer debt had reached a new high of $12.8 trillion, up from $12.7 trillion in 2008. This has been attributed to soaring student and auto loans, along with total credit card debt reaching its highest level since Q4 2009. In addition credit card delinquencies have seen an upward trend.