Risky and costly consumer debt could put a strain on already struggling families
Talk about going in the wrong direction. As the US Senate procrastinates on more help for struggling families during the recession, Treasury Secretary Mnuchin has suggested families should get a loan to get over them. It doesn’t matter that this feeling is deaf. It also completely ignores the reality that families are already deeply in debt. Any new debt would likely be high interest loans from credit cards and payday lenders.
Families still carry a lot of debt since the last debt boom. Massive amounts of household debt triggered the Great Recession and slowed the recovery. Much of this debt fell during and after the Great Recession, often through painful foreclosures and personal bankruptcies. Yet the debt has remained high. As of March 2020, the average American household still owed 95.6% of their after-tax income on mortgages, student loans, car loans, and credit cards, to name just the most common forms of debt (see figure below ). Households were already heavily indebted at the start of the current recession.
The overall number, however, doesn’t tell the whole story. Debt has become riskier and more expensive for households. Mortgages, which often carry lower interest rates and could be tax deductible, declined amid the housing crash that began in 2007. In December 2007, mortgages, including lines of credit on home equity, averaged 99.7% of after-tax income for all households. This average fell to 63.7% of after-tax income in March 2020. In comparison, student and auto loans, which carry higher interest rates than mortgages, have fallen from a low of 14.5. % of after-tax income in June 2010 to an average of 18.4% in March 2020. Families could not access mortgage debt as easily as before, but they borrowed elsewhere. Debt continued to be a crucial lifeline for families as the costs of education, housing and health care continued to exceed often stagnant incomes.
The current recession will likely force families to take on more debt as banks tighten their lending criteria. In April 2020, at the start of the pandemic, 38.5% of banks declared to tighten standards for credit cards, 16.0% for auto loans and 21.8% for all consumer loans excluding credit cards. and auto loans. And the share of banks willing to extend installment loans fell 20.0% in April. Debt is becoming increasingly difficult to obtain, although households are likely to need it more. Lack of access to debt from banks could lead some people to resort to high interest loans, such as payday loans.
More debt is often the only reserve left for struggling households. Job losses have escalated as the economy shuts down to tackle the new and sometimes deadly virus, but many families have little emergency savings to use to pay bills when income is lost . A Federal Reserve survey showed 36% of Americans couldn’t access $ 400 in an emergency in April, even as families waited for stimulus payments and added UI benefits to the era. Among those who lost their jobs or reduced their working hours, this share was much higher at 54%. People’s finances have only worsened as the deep recession wreaks havoc on jobs and incomes.
Black households, in particular, suffer more from costly consumer debt than Latinx or white households. Estimates based on the Federal Reserve’s distributing financial accounts show that in March 2020, African American families owed an average of $ 8,870 in consumer loans – credit cards, student debt and car loans – compared to an average of $ 4,233 in consumer credit among Latinx households. . White families owed much more than black or Latin families, averaging $ 32,609, but they also had many more assets to offset that debt. The ratio of consumer debt to all consumer durables, which includes cars, boats, and refrigerators, but not houses, gives an idea of how easily households could get rid of their debt by selling their assets. This ratio was 139.9% for black households and 99.9% for Latinx households, but only 58.7% for white households. In other words, white families could sell less than two-thirds of their assets and have enough money to get rid of all their consumer debt. On the flip side, Latinx families would have to sell all of their consumer durables to eliminate debt from credit cards, student loans, and auto loans, while black families could sell all of their assets and still owe more money. a third of their consumer debt. This suggests that consumer loans are the most likely to endanger the financial security of people who are already the most likely to experience job losses and the least likely to have emergency savings.
Little signs have emerged that households have indeed taken on debt again to pay their bills as the recession continued. Student and auto loans grew at an annual rate of 2.3% in May 2020 after falling 4.6% in April 2020, according to data from the Federal Reserve.
Many families could soon take on more debt. As of July 2020, estimates based on census data show that 24.1% of people were unemployed, because they lost their jobs or were put on leave, borrowed money through credit cards and other loans. In addition, 23.8% of those who incurred such debt while not having a job also borrowed money from friends and family. Receiving unemployment insurance checks does not necessarily prevent people from taking on more debt when they are not working, as 20.7% of the unemployed who received these checks also borrowed money in July. Financial support from the federal government, family and friends was not enough to keep many families from taking on more debt during the pandemic. As the recession continues, many households will undoubtedly feel even more pressure to borrow money to pay their bills. This pressure will increase now that Congress has not extended additional UI benefits.
With banks increasingly unwilling to lend, people will have to turn to more readily available credit to stay afloat during the recession. This could include higher interest rates and less regulated and therefore riskier debt. More debt, especially riskier and more expensive debt, is not the solution troubled households need. What they need is more income.