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Ineconomics,consumer debt is theamount 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. Inmacroeconomic terms, it is debt which is used to fundconsumption rather thaninvestment.[1]
The most common forms of consumer debt arecredit card debt,payday loans, student loans and otherconsumer finance, which are often at higherinterest rates than long-term securedloans, such asmortgages.
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 thedebt consolidation industry andcredit counseling. Debt also leads to a lowercredit score and may have effects on mental health.
The amount of debt outstanding versus the consumer's disposable income is expressed as theconsumer 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.[2] 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 withpredatory lending, although there is much debate as to what exactly constitutes predatory lending.
In recent years, analternative 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. Thepermanent income hypothesis suggests that consumers take debt tosmooth 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 USFederal Reserve's 2024 statistics, the US householddebt service ratio was at its lowest level since its peak in the Fall of 2007 in 2021, but has since risen.[3]
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 annualGDP. A variant is theconsumer leverage ratio, which is the ratio of debt to personal income.
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