, 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
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
terms, it is debt which is used to fund consumption
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
The most common forms of consumer debt are credit card debt
A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a short-term unsecured loan, often characterized by high interest rates.
The term "payday" in payday loan refers to ...
s, student loans and other
Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.
When planning personal fi ...
, which are often at higher
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, th ...
s than long-term secured
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
s, such as
A mortgage loan or simply mortgage (), in civil law jurisdicions 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 to raise funds for any p ...
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 precipitated a growth industry in
Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt, but occasionally it can also refer to a coun ...
Credit counseling (known in the United Kingdom as Debt counseling) is commonly a process that is used to help individual debtors with debt settlement through education, budgeting and the use of a variety of tools with the goal to reduce and ultima ...
. The ease of accumulating debt so easily has made it harder to repay these incurrences which leads to lower credit score and has links to 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 individuals 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 200 ...
, 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 of overall domestic production. The
permanent income hypothesis
The permanent income hypothesis (PIH) is a model in the field of economics to explain the formation of consumption patterns. It suggests consumption patterns are formed from future expectations and consumption smoothing. The theory was develope ...
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. However, according to the US
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
, the US household
debt service ratio In economics and government finance, a country’s debt service ratio is the ratio of its debt service payments (principal + interest) to its export earnings.Glossary of Statistical TermsDebt service ratio OECD, Sep 25, 2001. A country's internation ...
is at the lowest level since its peak in the Fall of 2007.
Debt-to-GDP ratio, consumer leverage ratio
A country's private debt can be measured as a '
In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured ...
', 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
Consumerism is a social and economic order that encourages the acquisition of goods and services in ever-increasing amounts. With the Industrial Revolution, but particularly in the 20th century, mass production led to overproduction—the sup ...
Consumer credit risk
''The following article is based on UK market, other countries may differ.''
Consumer credit risk (also retail credit risk) is the risk of loss due to a consumer's failure or inability to repay ( default) on a consumer credit product, such as a mo ...
* Current rates from the World Bank
U.S. consumer credit outstandingIn-depth reports on debt and borrowing in the United Kingdom