Economy Events

Consumer Credit – Is It Good For The Economy?

Consumer loan, also termed as consumer credit or consumer lending, such as those by, is money lent (typically on a nonsecured basis) to a borrower or a person for numerous purposes, whether it’s for family, personal or household use.

Regulatory agencies of the government monitor these types of loans to ensure they comply with regulations on consumer protection like the Truth in Lending Act.

One of the most significant element that drives the economy is credit. Since credit brings about a rise in spending, it therefore also increases the levels of income in the economy which in turn directs to a higher gross domestic product (GDP) and thus result in a speedier productivity growth. If and when credit is utilized to acquire resources that are productive, it adds to the revenue and aids in progress of the economy. Moreover, credit further steers to the generation of debt cycles.

The Economy Benefits from Consumer Debt

Consumer debt also termed as consumer credit is what you owe, contrasted with what the government or a business owes. It could be borrowed from financial institutions, credit unions, as well as the federal government. It’s not easy for consumers to perceive debt as a piece of good fortune, since it signifies that they have a responsibility to pay off their lender from their salaries and earnings. It could as well denote acquiring charges in interest that are costly. However, debt could essentially be a positive aspect from the stance of the whole economy.

Consumer debt in the United States rose 5% to $4.09 trillion in May 2019. That exceeded the record of $4.07 trillion in June 2019.

$3.016 trillion was accounted to fixed-payment loans or non-revolving debt rising to 3.9%. Majority of these non-revolving debt is on auto and education loans wherein school debt reached $1.598 trillion and auto loans at $1.161 trillion in March 2019. On the other hand, credit card debt amounted to $1.072 trillion, rising 8.2% which topped the record of $1.02 trillion in 2008.

Consumer debt is a factor in the growth of the economy.  Provided that the economy raises, debt is more quickly paid back in the future, since your education lets you secure a job that pays better. That generates an ascending cycle, improving the economy all the more.

Downside of Debt

Although debt could be beneficial to the economy, it could be harmful as well, particularly for the borrower. If the economy is subjected to recession, you may lose your employment and may encounter defaults. This could mess up your credit rating, as well as your capability in the future to obtain loans. Even though the economy continues to be boom, you could acquire too much debt not because of poor spending practices but because of unforeseen and unwanted circumstance such as medical bills.

The wisest approach to evade the disadvantages of debt is to settle it every month. Moreover, save up at least six months’ worth of expenditure. This will protect you and give a breathing space in case of recession, unemployment, or unexpected expenses.

The Impact of Lenders to a Country’s Economy

Banks act as a bridge between people who need money to be used for investment and those who have spare. As industry and business demand huge investments, private financing is typically not enough for their requirements. Basically, these people are borrowing non-corporate as well as corporate loans from banks and commercial institutions.

Lending Options

In addition to banks, these can extend to retail loans among consumers who are seeking for mortgage, consumer durables and even to farmers who seek for farm credit to keep their agriculture alive. In regards to home loan buyers, buying a house at the start isn’t possible because it demands a significant amount of money and they find it more convenient to pay back the loan for a period of 30 years in lower monthly installments.

As for farmers, they find it more convenient in repaying the loan after making harvest and seeking for another loan or personal loan from Zebra loans for their next crop. Basically, the cycle just continues.

Then again, there are some people who opt to save and earn interests from the extra money that they have. Most of the time, these people are:

  • Salaried
  • Middle Classes
  • Small Savers and;
  • Corporate Institutions and Government Deposits

Simply speaking, these are at individual or micro level.

Credit Options of the Economy as a Whole

If we are going to look at these loans from a macro level, then we’ll find that banks are lending their money after statutory liabilities have been met. They are earning profit to keep their operations.

As a matter of fact, even governments are borrowing from RBI in an effort to meet budget deficits.

It is even borrowing from IMF as a way to meet balance of the imbalances of payments. Then again, governments are borrowing from World Bank or WB as well as its associates similar to IDA and ADB or Asian Development Bank for development purposes. Therefore, the credit serves as lubricant in keeping up with the continuous growth of the economy.

In spite of the positive impact it brings, there are elements of bank lending that could adversely affect the economy if it fail to recover. The unpaid bad debt is referred to as Non-Performing Advances which must be regulated to make sure that it is within the tolerable limit. If not, several banks will start to fail and the depositor’s money would be unpaid.

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