Consumer Credit

Consumer debt continues to rise in the United States, up to nearly $14 trillion – surpassing the total amount of household debt held before the 2008 financial crisis[i].

The largest component of household, or consumer debt, is mortgage debt. Americans owe nearly $10 trillion in mortgages. The next highest portion of consumer debt is student loans, which comprise about $1.5 trillion of the debt pie. That’s a steep rise from student loan debt at the height of the financial crisis – at that time, student loan debt was at $611 billion[ii].

Auto loans are close behind, at about $1.3 trillion, and credit card debt is the fourth largest type of consumer debt – at about $870 billion[iii].

Today, consumers are choosing to a new debt offering: point-of-sale consumer loans. Retailers have discovered that a growing number of consumers will choose installment debt over adding to their credit card debt.

Where consumers see credit card debt as a consuming black hole, installment debt gives a defined payment and finite end to loan repayment. Financial technology (fintech) companies such as Affirm, which offers point-of-sale consumer loans, have seen an explosion in growth: Affirm’s loans doubled last year[iv], and are expected to double again this year.

Attractive to consumers who choose consumer loans: often lower interest rates, and the feeling of more control. Some who use consumer loans believe installment plans push them into greater discipline and a chance to borrow for very specific items[v].

Credit card companies see the opportunity and have rushed to fill this new consumer demand. Nearly every major credit card company is now offering some sort of installment loan, and Mastercard, Inc. recently purchased fintech company Vyze, which enables point-of-sale lending[vi].

Many experts are concerned about the ration of debt compared to the United States population, which has grown to $41.77, higher than $41.68 reached in 2008[vii].

Some economists point to a different economic climate than 2008. Today’s GDP appears to reflect an economy doing much better than 2008. Perhaps growing GDP can support the growing debt burden – despite the increase in consumer debt, delinquencies in consumer debt are nearing record lows[viii].

If our current economic climate were to turn, consumer’s new debt dalliance may prove to be trouble. For the time being, the economy is supporting the rise in household debt.

[i] https://www.marketplace.org/2019/09/24/what-you-should-know-about-household-debt/

[ii] https://www.marketplace.org/2019/09/24/what-you-should-know-about-household-debt/

[iii] https://www.marketplace.org/2019/09/24/what-you-should-know-about-household-debt/

[iv] https://www.wsj.com/articles/eyeing-that-sweater-its-yours-in-four-easy-payments-11569672000 

[v] https://www.wsj.com/articles/eyeing-that-sweater-its-yours-in-four-easy-payments-11569672000

[vi] https://www.wsj.com/articles/eyeing-that-sweater-its-yours-in-four-easy-payments-11569672000

[vii] https://www.marketwatch.com/story/us-consumer-debt-is-now-breaching-levels-last-reached-during-the-2008-financial-crisis-2019-06-19

[viii] https://www.marketwatch.com/story/us-consumer-debt-is-now-breaching-levels-last-reached-during-the-2008-financial-crisis-2019-06-19