Debt Consolidation May Be The Best Holiday Gift for 2021
Consumer debt levels are starting to rise at a worrying pace, which doesn't bode well for future economic growth. According to the Federal Reserve Bank of New York, debt in the U.S. at present is 216% of GDP, an all-time high.
IHS Markit chief economist Nariman Behravesh noted that consumers have been keeping up with the debt they already have while also incurring more debt, which can lead to problems down the road if not handled correctly. He commented: "People are feeling good about things." Despite concerns around debt levels potentially becoming unsustainable, he says debt could continue growing but it's unclear how much more consumers can take on without encountering financial difficulties.
"Consumers need to be concerned about debt" (Source: IHS Markit)
The New York Fed's report also noted that overall debt was "largely stable" in the third quarter of 2021, but for debt levels to remain sustainable over the longer term, debt repayments need to grow at least as quickly as incomes. This is not yet happening across all debt types, especially among consumers who are taking on new debt. Behravesh added: "It's definitely something we're watching."
With consumer debt levels continuing to rise, interest rates will likely increase too. If people are unable to cope with higher monthly payments they could default on their debts altogether which would have a profound impact on the economy. It will be worth examining how consumers react if wages don't grow at the same level as debt levels.
According to research by economists at UC San Diego, debt is an important factor in how consumers manage their finances, particularly lower-income households. The report claimed that there's a strong link between debt repayment and economic growth because if debt levels are rising faster than people can repay them, this "can dampen consumption and aggregate demand." It went on to explain that debt-to-income ratios have been rising since the Great Recession of 2008/09, which has led to more households having debt obligations that take up more than 40% of household income before taxes.
Paying off High-Interest Credit Cards in 2021 Make Sense with Rates Expected to Move Higher in 2022
The debt that builds up, in the long run, appears to be destined for non-mortgage debt products such as credit cards rather than mortgages. The report also revealed that the debt-income ratio is likely to increase further in the next few years, with most of this debt being due to credit card loans and student loans.
Most economists believe interest rates will continue increasing gradually but no one knows how far they'll go so it's impossible to predict whether consumers can handle higher monthly debt repayments. Its possible people will become more responsible about debts and manage them better, but there are fears that if interest rates come into play it could mean some people default on their debts altogether which would have a detrimental effect on income levels and spending habits across the economy.
Paying off credit cards and high-interest debts, with personal loans offering interest rates below five percent can save consumers thousands of dollars per year.
At present debt levels are being managed quite well by consumers but this may not remain the case if interest rates rise significantly, something everyone is expecting at some point in the future. If debt repayments do become too much for people to handle, it could dramatically change consumer habits which would have a knock-on effect on income levels and spending habits across the economy.
With debt levels expected to keep rising over the coming years, debt management strategies could help people control their debts better or provide an affordable solution for debt consolidation loans. Interest rates are only expected to increase gradually over time so there's no need to panic just yet