Financial news media have sounding alarm bells over the last few years about rising consumer debt levels. They have pointed to new Fintech products, such as online personal loans, as a big concern. The media claim these debt instruments have recently grown rapidly. What they fail to point out is that consumers have been gravitating to these products in favor of credit card debt.
Rising Debt (and Income)
On the surface, rising debt levels sounds bad. Actually, for some households, it is bad! But, let’s not forget that employment has been steadily increasing over the last several years to a historic level. Also, wages have been on a healthy rise over this same period. Therefore, an increase of total overall household debt is both understood and manageable.
Under the surface, what’s really going on is that consumers are shying away from taking out new lines of credit and credit card products. They are instead signing up to pay for large priced items with fixed and predicable installment payments via online personal loans. This is a more disciplined approach to managing personal debt than revolving lines of credit that can continue to rack up interest expense in perpetuity! The fixed monthly payment fits nicely into a monthly budget. Like a credit card balance, the personal loan can be paid down early without penalty, thereby saving on interest expense.
When news reports and trade articles sound the alarm bells over debt levels, take it with a grain of salt. Households are in much better shape than during the Great Recession of 2008-2009. This 2019 article from MarketWatch hits the nail on the head. The media tend to sensationalize things, such as The Wall Street Journal’s article from August 13, 2019 boldly proclaiming “U.S. mortgage debt hits record, eclipsing 2008 peak”. Well, yes it has. Could it be the result of approximately 30 million more citizens living in this country since 2008 and that consumers are generally in strong financial condition?!