Debt has become an American way of life. Most people of all ages and from all walks of life incur a level of debt at some time in their lives.
Therefore, it makes sense to understand the different types of debt that most of us incur at different times in our lives and why. In this article, we’ll explore “the state of the debt nation” at the end of 2022 and some practical ways to deal with it.
Debt refers to the assets – usually money – that one person or entity borrows from another. Consumers often take out debt to fund large purchases that they’d be unable to afford otherwise, such as a home or vehicle. This is known as long-term debt. Many people also use debt to fund short-term purchases, using credit cards or payday loans.
In all cases, the debt arrangement entered into stipulates that the borrower must pay the money back at a later date with interest.
In the nineteenth century, if somebody needed credit, they turned to family and friends, loan sharks, or local merchants. It was common for anyone with spare cash to lend it to consumers or businesses.
The invention of the automobile in the 1920s saw the rise of finance companies that acted as intermediaries, borrowing money from banks and lending it to car dealerships. That latter would, in turn, offer financing plans to individual consumers.
From that point, the concept of borrowing to fund personal goods quickly extended to include everything from appliances and furniture to electronic goods.
In the 1930s, following the Great Depression, the federal government created the Federal Housing Administration as a mechanism to connect banks with home buyers and guarantee the mortgage loans they made.
In the 1930s, General Electric created a subsidiary called GE Credit Corporation (GECC) to finance purchases of its own products. In the 1960s, GECC started offering revolving credit to finance all manner of products. It also started managing various retail companies’ credit operations. By 1969, one in twenty-five households used GECC credit in one way or another.
By the 1980s, the federal government, financial institutions, and Wall Street had made it possible for loans to become available not just for mortgages but for credit card debt, auto loans, and almost any other kind of consumer debt.
Debt, per se, isn’t necessarily a bad thing. After all, most of us don’t have cash on hand to buy a home or a car or put our children through college. When thoughtfully approached and carefully managed, debt is an acceptable part of a longer-term financial plan.
However, debt can easily become a source of worry and risk. Not only do you have to make regular repayments to lenders, but the interest payments on outstanding balances can also quickly mount. If you’re repeatedly late or default on your repayments, it could impact your credit score negatively.
As of September 2022, consumer debt stood at $16.5 trillion, with the average American debt among consumers being $96,371. Let’s look at some of the debt dynamics in play:
As the economy has started to recover from the effects of the pandemic, we’ve seen inflation rise to levels not seen since the late 1970s. This has put pressure on consumers’ wallets, and, as a result, average American debt is up in nearly every category when compared to 2020 levels. These categories include overall household debt, credit card, mortgage, and auto loan debt.
Perhaps more concerningly, the percentage of personal and auto loans in hardship is also higher than what we saw in 2020.
Household debt payments as a percentage of household income figures from the second quarter of 2022 reveal that the average consumer spends more than 9% of their monthly income on debt repayments.
The Federal Reserve Bank of New York’s Center for Microeconomic Data’s latest Quarterly Report on Household Debt and Credit sheds light on the shifting dynamics of consumer debt in the country.
The Report reveals an increase in total household debt in the second quarter of 2022, increasing by $312 billion to $16.15 trillion. Debt balances are now $2 trillion higher than they were at the end of 2019 before the pandemic hit.
Gen X consumers, on average, have the highest levels of personal debt, followed by Baby Boomers. Gen Z consumers carry the least total debt on average. Here’s an overview of average debt balances by age group:
We’ll explore each of these types of debt in more detail below.
More Americans are turning to their credit card to pay for essentials such as food, gas, and housing. Average credit card debt is rising at its fastest rate in over 20 years, and the average American has a credit card debt of $5,221.
Rising interest rates aren’t helping: Current average credit card rates, at 18.7 percent, are at their highest level in 30 years and will probably continue rising, according to Bankrate.
Many people use credit cards to fund non-essential or luxury items such as clothing, gadgets, jewelry, and vacations. Come month-end, when their credit card bill arrives, they pay only the minimum amount owing.
Personal loans involve you borrowing a specific amount from a lender and paying it back over a specified period through a series of installments. The loan amount, repayment amounts, and repayment terms will be determined by your lender, although some will be open to negotiating these parameters with you. The money borrowed through personal loans can be used for anything from weddings to home improvements or even debt consolidation.
According to the Experian report cited earlier, almost one in four American adults have personal loans, with the average amount of this debt being $17,064.
Payday loans are small-dollar credits against future earnings in the form of a paycheck. The lender can take a signed check from the borrower, which the lender cashes on the day of the next paycheck. Alternatively, the lender can take the checking account information from the borrower for a direct withdrawal from the account on payday.
While they are easy to obtain, payday loans are far from cheap. Let’s look at an example. Payday loans are usually around $350. The fee or interest charged by the lender typically ranges from $15 to $30 per $100 borrowed for two weeks. For a $350 loan, the repayment amount is $402.50 in two weeks. The annualized percentage rate (APR) on this loan is approximately 387%.
By comparison, credit card APR rates are normally around 15-30%. So, payday loans are a very expensive way to get a cash advance.
Given the high cost of most vehicles, few people can purchase them upfront, so they take out an auto loan and pay off their car over a few years.
Auto loans are currently the second-most prevalent type of debt in the country. The average amount of debt for auto loans in the US is $20,987.
Student loans are how millions of US students pay for their higher education every year. The average amount of student loan debt is currently $39,487.
Unsurprisingly, people in the 18–29 age bracket account for 34% of student debt, according to the Department of Education.
Despite its steep cost, student loan debt pays longer-term dividends. Earning a degree generally increases an individual’s future earning prospects. According to the US Census Bureau, people who have a degree make an average of 71% more than their counterparts who only hold high school diplomas.
Home equity lines of credit (HELOCs) give homeowners access to cash by putting their homes up as collateral.
The Experian report indicates that the current average US debt for HELOCs is $39,556.
Mortgage debt is by far the most significant form of debt in the US, with the current average amount of this type of debt standing at $220,380.
This represents a 5.9 percent increase since last year, but this is partly due to increasing real estate prices. When interest rates rise, it leads to an increase in the monthly payment for a loan of the same amount. For instance, with a 4% interest rate, a $250,000 mortgage would cost you $1,194 per month. At 6% interest, the same loan would cost you $1,439.
Throughout 2022, interest rates have steadily increased, and the housing market has already started to cool down in many areas. These changes may impact mortgage debt over the next year.
Too many of us end up getting into a cycle of debt because we rely on credit to fund day-to-day rather than longer-term expenses. Debt can be enticing, but it can also be a deadly trap. Here are some of the risks:
It’s not surprising that money worries can place a huge burden on your mental and physical health. Finance-related stress can lead to unwelcome side effects, including:
Your credit score could be impacted if you carry high balances on your credit cards and have difficulty paying more than the minimum each month.
Lenders and creditors see borrowers with lower credit scores as riskier, and as a result, you’ll likely receive higher interest rates on your debts than you would if you had good or excellent credit. In some cases, you could be denied financing altogether.
If you apply to work in law enforcement, financial services, or the military, your employer may conduct a credit check when you apply for a position. If you’re carrying too much debt, you might be unsuccessful because a vulnerable financial situation is perceived as putting you at a statistically higher risk of accepting bribes.
Here are a few practical steps to rid yourself of the burden of debt:
Developing a budget will allow you to monitor how much money is coming in, how much you’re spending, and what you’re spending it on. Once you’re more aware of your income and expenses, you’ll be in a better position to eliminate or reduce unnecessary costs.
Commit to paying off the debt you currently owe before adding any new debt. So, avoid making any unnecessary purchases.
When you pay your bills in full and on time every month, you’ll steer clear of high-interest rates and late payment penalties. If you simply can’t make full payments, aim to pay more than the minimum due to avoid paying additional interest and fees.
Make a point of reviewing every bill and statement you receive to ensure that there are no errors and that your interest rates haven’t changed. If you pick up a discrepancy, contact your lender immediately.
Knowing where to start can be difficult if you have multiple debts to tackle. The best approach is to start paying off the debts with the highest interest rates and fees first. This will reduce the amount you owe in the longer term.
Consider reducing the number of credit cards you have to manage your debt more easily and stick with the ones with the lowest interest rates.
A debt consolidation loan from a bank or credit union gives you the means to manage your debts more easily as you only need to make a single payment to the bank or credit union rather than multiple payments to all your current lenders. In addition, banks and credit unions may be prepared to offer you a lower interest rate than the rates on the existing loans you owe.
It’s also a good idea to contact the lenders to which you owe money and see if they’re open to setting up a repayment schedule that allows you to reduce your monthly payments.
If you feel you need expert help in developing a workable debt repayment plan, consider speaking with a financial advisor or credit counselor. However, be wary of anyone who claims they can settle all your debt fast and cheaply, as they might be planning to defraud you.
Once you’ve successfully reduced or paid off your debt, be vigilant about avoiding falling into debt once more. One way to do this is to phase out your use of credit cards and start using only debit cards or cash instead.
Taking small, incremental steps and congratulating yourself for every quick win will give you a sense of empowerment and control. More importantly, it will put you on track to gaining financial stability and security.
As we’ve discussed, debt is a widespread and multi-faceted challenge. Becoming financially stable and secure isn’t an easy task for anyone.
In the current economic climate with lots of uncertainty, we should eliminate any unnecessary or excessive debt.
There’s no one-size-fits-all solution, as every person will have their own set of circumstances and challenges.
Payment flexibility is one approach that’s growing in popularity among employers and employees alike. Specifically, Earned Wage Access (EWA) services, such as that offered by Payactiv, are an increasingly common element of benefits packages.
EWA allows you to access the money you’ve already earned before payday quickly. It can happen in several ways: the funds can be loaded onto a debit or prepaid card, transferred to your bank account, or even picked up as cash at Walmart. Alternatively, Payactiv allows you to use your earned wages to pay for services like Uber and Amazon or pay bills directly in the app.
The best on-demand pay service providers give you choices with how you want to access your money and always provide a free option. Look for the instant deposit feature so you can access your earned wages in real time in case of emergencies. Some providers also include additional perks like discounts, special offers, budgeting tools, savings tools, and free bill management.
You can get started with Payactiv right away, even if your employer doesn’t offer it.
Join Payactiv and create an account today!
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