People facing tough times fall into a debt trap for many reasons. They may have a hard time matching the rise in inflation and can resort to quick loans for their household expenses. Or they may have a hard time getting out of debt and end up refinancing their loans — and dig themselves further into financial troubles.
Consumer debt is a broad term that includes every debt a household may need, from buying a car to paying off credit cards. And every one of us is guilty of getting a loan at one time or another in our life. But the biggest issue arises when the debt starts building up, and people are in no position to pay them off.
This seems to be the prevailing narrative, with the total household debt in the US rising from $15.84 trillion in Q4 of 2021 to $1.7 trillion in Q1 of 2022, based on the Household Debt and Credit report published by the Federal Reserve Bank of New York. Even with things getting back to normal after the financial difficulties brought by the COVID-19 pandemic, it’s still higher than the end of 2019 — the year before the pandemic started.
The debt across all the major categories has increased, starting from the huge mortgage loans to credit card debts, and this blog will look at the extent of the impact and how we can manage it.
Mortgage Loan Debt
Mortgage debt is the biggest type of consumer debt and has been increasing steadily since the Great Recession. This is because more people are buying homes and taking out mortgages than ever before.
The mortgage debt has shot up by $250 billion in the first few months of 2022 and is now standing at $11.18 trillion. And almost 44% of the US mortgages originated between June 2020-21.
This is happening because home prices have been going up faster, with a 10.5% increase in the first half of 2021. These rising prices mean it’s harder for buyers to afford their monthly payments without taking out bigger loans. Plus, many homeowners have refinanced their loans several times over the years, which has extended their repayment terms and increased their total loan balances. This means debtors are putting themselves under more pressure and debt from multiple loans at high interest rates.
Auto Loan Debt
Auto loans can be useful for financing a new car, but they also come with varying interest rates based on the credit score.
While auto loan debt has increased by $11 billion in the first quarter of 2022, this increase is due to the high value per loan rather than the rise in the total number of loans. Also, the major increase in auto loans has been primarily from Millennials and Gen Zers who have purchased their first cars.
As with other forms of consumer debt, auto loans can be risky for consumers who cannot afford them in the long term, as they may not be able to repay the accrued interest charges over time.
Student Loan Debt
Student loan debt has increased significantly as more people have started pursuing higher education. This has led to many graduates entering the workforce with large student loan payments to cover every month with their nominal wages.
Even with the pause on the student loan debt still in place, it has increased by $14 billion to stand at $1.59 trillion by the first quarter of 2022. Incidentally, while most Americans view mortgage debt as good debt, many have started viewing the student loan debt as a bad debt.
Some of this might be due to recent difficulties many young people face in repaying their student loans due to the inflation and have started relying on their parents. In a 2022 College Hopes and Worries Survey by The Princeton Review, student loan debt has been the top worry for parents and children. And with layoffs and pay cuts during the pandemic, many new graduates have been struggling to pay off their loans and have started turning to their parents for financial assistance.
Credit Card Debt
Credit cards are among the most popular forms of consumer debt. You can use them to make purchases or get cash advances, and they usually come with rewards programs and low-interest rates if you make timely payments on time. However, credit card debt can quickly spiral out of control if people don’t keep track of their spending or repay the balance in full every month. The convenience of credit cards makes them an easy target for abuse and has contributed to significant amounts of credit card debt that they cannot pay off.
Even with the government benefits for unemployment, inflation has caused many Americans to use credit cards to keep up with the rising demand. In just the last three months of 2021, credit card debt rose by $52 billion, registering the highest quarterly increase in its 22-year history.
Many people carry an outstanding debt balance on their credit cards month after month without paying off their balances in full each month. This often results in high-interest rates that can make repayment difficult for some consumers.
Medical Debt
Medical debt can have a devastating effect on a person’s finances since it’s the most unexpected and unplanned debt of all. Medical debt is often more difficult to deal with than other types of debt because of the spontaneous nature of accrued debt due to unavoidable medical emergencies.
Almost 56% of Americans have some form of medical debt, with 1 in 4 adults owing more than $10,000. 61% of people with employer-provided insurance and 69% with self-purchased insurance still have significant medical debt. Among them, 43% are on a payment plan, while 25% negotiate their bills. That said, 14% are thinking about declaring bankruptcy, while 17% aren’t making efforts to pay it back.
Medical debt, like the other consumer debts, may have devastating effects since it can damage the credit score. And when you ignore these debts, the interest can pile up more, and it becomes even more challenging to pay them off altogether at a later period. The best way to handle such debts is to come up with a practical payment plan to slowly and surely pay off all the debts.
At Capital Recovery, we help healthcare organizations, insurance providers, and commercial businesses recover their debts through practical and customizable plans. Our team is expert in helping people settle debts fairly and peacefully on favorable terms for both the lenders and the borrowers. Contact us today to learn about our risk-free debt collection.