Question

How does consumer debt affect the economy?

Answer 1

Consumer debt consists of personal debts that are owed as a result of purchasing goods that are used for individual or household consumption.Consumer debt may be segmented into revolving debt, which is paid monthly and may have a variable rate; and non-revolving debt, paid as a fixed rate. Examples of Consumer debt include credit card debt, study loans, auto loans, house loans etc.

Advantages of Consumer Debt

• It helps in growth of economy and smoothening of consumption. It increases spending and Aggregate Demand. This in turn results more production of goods and services which helps in growth of economy.
• Also the education loans help the students to get better education and secure high paying jobs which help them in earning good income which again redults in growth of economy.

Disadvantages

• Consumer debt negatively affects the economy when consumers spend less. When inspite of low interest rates and reduced taxes, consumers spend less and save more then this results in the stagnation of economy as Aggregate Demand is reduced.
• Another problem arises when Consumer debt rises too much. Sometimes Consumers take too much debt and are unable to pay back due to less income. This results in debt trap and is determinal both for consumers and economy.
• Consumer debt also imposes real costs to the economy such as higher health care costs for the higher rates of illness debt-stressed people suffer), in the future when lower levels of retirement savings among the debt-stressed will mean more public assistance requirements in their old age.

To conclude Consumer debt has both positive and negative sides. Excessive debt may make the consumer fall into debt trap and too little debt may adversely affect the economy by economic stagnation and recession.