The modern human takes the help of loans in every step of the life. Debts are interrelated with the financial life of any social individual. For financial survival, a person needs the assistance of several kind of debt. Some needs the assistance of real estate loans for acquisition of some properties for securing their future and family. Some needs the support of loans to get educational degrees and building up their life. Some needs financial assistance to invest in business and to secure their earning. Some might get in the need of quick financial support for getting rid of an emergency problem. All these debts are classified as loans that meet the special needs of the borrowers. Besides all these special need debts, there are some debts that are used or borrowed only to meet the need of consumption for the consumers. That is why; this category of loan is termed as consumer debt.
Below, a brief definition of consumer debt is given:
What is consumer debt?
The economic experts define the consumer debt as a different category of debt that that of the debts borrowed for business investment or the debts borrowed from the federal government to meet the fundamental needs. The experts of macroeconomics have theorized this loan as a debt that is made by the consumers only for meeting the need of consumption. The borrowed money obtained through the consumer debts are generally used for only consumption expenditure and there is a few chance of utilizing the money for investment. The amount of money that is obtained through consumer debt is used for purchasing those products or services that are totally consumable. Thus, this expenditure does not provide any economic return, other than the satisfaction of consumers through consumption of goods.
Debates on the benefit of consumer debt:
Though the consumer debts are only used for consumption expenditure, it has fueled different kind of debates among the financial experts.
The school of financial experts against the consumer debts:
Some school of financial experts does not appreciate the consumer debt as good loans. According to them, when a borrower makes a loan, he or she does not have to repay the capital debt amount only, rather there are additional financial burdens like the interest rates charged on the loan and the loan fees as well. A borrower should not make such a financial burden if there is no special need or the purpose of loan is not bringing economical benefits. They certainly discourage the habits of borrowing money for consumption. They emphasize that the regular consumption expenditure of an individual should remain within a budget according to the regular income of the consumers. A consumer should not exceed the consumption budget and increase it into a level that does not fit the regular income.
The school of financial experts supporting the consumer debts:
On the other hand, there is some school of financial experts who thinks that the increase of consumer debt results in increased household production. These financial experts provide logics based on their permanent income hypothesis. According to this hypothesis, a limited income cannot ensure the smooth daily consumption for an average social individual. If there is a limitation in maintaining the daily consumption, then it surely decreases the standard of life of the individual. A limit in maintaining the standard of life hampers the development of future opportunities. Thus, through a limited a budget, an individual gets framed into a certain limit of household production. The domestic production limit cannot be maximized without the assurance of smooth daily consumption maintenance and a standard set of lifestyle.
The consumer debts support the individuals to maintain smooth consumption of daily requirements. These flexibility of daily life helps in full development of the consumers and they becomes inspired to maximize their productivity. A healthy development helps them to explore their potentials and grab the opportunities to maximize productivity. The total household receives a boost in production. So, even if they have made some debts in their early life, they do not face any challenge to repay these debts later during the higher income generating period.
That is why; these financial experts think that the consumer debts should become more available for the consumers of the country, so that the total population of the country receives this output of increased area of opportunities to explore and enriched personal development. These positive outputs will surely create an impact that would help the maximization of net gross domestic production for the whole economy of the country. That is why; they consider that the consumer debts can surely be categorized as good loans, considering the vast benefit it can bring towards the whole economy of the country.
Present scenario of USA regarding consumer debts:
Surely the later school of financial expert has been able to establish their thought in USA. The consumer debt is very much familiar to the people residing here. The total economical system of the country is consumption based. The consumers get very easy access to consumer debts. Though, the concept of borrowing personal consumption was limited to only for the purposes of acquisition of assets. People used to believe in various cultural taboos that prohibited them from making personal debts. The expansion of money lending business, the vast use of technology in lending process and the variety of flexibility offered towards the customers have successfully grabbed the attention of borrowers to take this loan opportunities. Now a day, the consumer debt providers deal with the biggest share of borrowers than any other lenders of the market. The consumer debt service ratio is in its peak where the household debt service ratio has reached to its lowest level in the history.
The common types of consumer debts made by the borrowers:
There are several types of consumer debts aimed to support the consumers to maintain their consumption needs. Among other debts, the credit card debts, pay day loans are the most common category of consumer loans received by the borrowers. There are also other types of unsecured consumer debts. The unsecured consumer debts are commonly considered as risky for the borrowers as the lenders charge high interest rates and other additional fees for these loans. In fact, you can say that the highest rate of loan charges is applied to the unsecured consumer loans. A borrower will not have to spend as much money for long term secured loans like mortgage loans as they have to spend for these unsecured short term consumer loans.
The credit card debts or the pay day loans are kind of loans that are obtained very easily by the borrowers. The lenders, who provide such loans, are available in sufficient numbers to deliver these loan services towards the borrowers. The borrowers are also awarded with the online loan facilities for such loans. So, to obtain these loans, they do not have to go anywhere or take out time from their busy schedules. The lenders deliver these loan facilities right at their doors.
The usage of credit card debts:
Two out of three individuals now uses credit cards for maintaining their regular transactions. You will hardly find any person who is dealing with cash to make regular purchase. From utility bills to grocery, people use credit cards to make these expenditures. From buying a car to the purchase of a needle, the consumers utilize the facility of consumer loans everywhere.
Actually, the flexibility and the availability of credit cards have caused such an expansion of demand for the consumer debts among the borrowers, and it is growing every day. The huge amount of usage of credit cards across the whole country has totally transformed the transaction style for goods. People no longer believe in carrying cash with them for making transactions. The credit cards have removed the need of carrying cash money. Credit cards are the new age digital money source for the people that open the world of consumption to them with a single scratch and security code.
The usage of payday loans:
The credit cards are usually used for making small amount expenditures. When the borrowers are in need of making big amount of transactions for consumption, they take the help of the payday loans. In most cases, a person seeks for the pay day loans for meeting the emergency requirements or to cover up unplanned expenditures. The pay day loans are ideal for emergency or unplanned expenditure as they are provided very quickly. If you need a big amount of money to be spent and that too within a very short time, you can rely on the support of payday loans. The loans are provided instantly on the response of the application of the borrowers. As these loans are very short termed, the borrowers are also given a very short time to repay the loans along with other financial obligations. The emergency problems are also short termed. So, a borrower usually finds no problem to repay these loans within this very short time frame.