American Debt – An Overview

The American flag waving in front of the US Capitol building
Managing & Paying Down Debt
Part 1 American Debt – An Overview
Part 2 Types Of Debt
Part 3 Debt Management – Doing It Yourself
Part 4 Debt Help – Getting The Assistance You Need

Recent reports state that Americans are continuing to accumulate large levels of debt. This includes household debt, student loans and thousands of dollars borrowed to buy automobiles. If you add in mortgages and credit card balances, the total sum seems almost insurmountable and financial experts have worries that ordinary families are becoming enslaved by debt. In this article we shall be looking at:

  • Interest figures of US debt
  • How interest rates contribute to debt
  • What debt is exactly
  • Good and bad debt

After the last financial crisis, credit was in short supply but as the economy has improved, banks and finance companies have loosened their purse strings and are willing to hand out money almost as freely and easily as they did before the great crash in 2008.

American debt – Interesting figures

The total amount of debt accumulated by Americans amounts to over $1.3 trillion. Students are graduating with debts of around $49,000 each and the average sum owed by households is more than $16,000 and this does not include the mortgage.

The total amount of debt accumulated  by Americans is over $1.3 trillion

Personal loans, payday loans, automobile loans and miscellaneous debts add up and many households actually owe as much as $40,000. If you include mortgages, the average sum for each household comes out at $139,500.

High interest rates

As the recession that took hold in 2008 started to recede banks have been more willing to lend but at higher interest rates than before. There has been a surge in payday lenders who also charge very high interest rates and the gap between the rise in earnings and the rise in the cost of living has widened considerably.

As the recession that took hold in 2008 started to recede banks have been more willing to lend but at higher interest rates than before.

When times became difficult many families began to rely on credit cards and loans to cover the shortfall in expenses and now there is a large section of society that has become a slave to both credit and debt.

What is debt?

Debt is money borrowed by one person from another. There is a promise to repay the loan with interest and the most common forms of debt are mortgages taken out to buy a home, funds borrowed to buy an automobile and goods purchased using a credit card.

A man is holding out dollar bills intending to make a loan agreement

Each credit agreement features the terms of the loan and specifies how much interest will be charged and when the repayment is due.

Good debt versus bad debt

Many new start ups use loans to subsidize a faster expansion and established corporations also take advantage of large loans. Different kinds of businesses use debt in different ways but overall most business debt is looked upon as good. However, for ordinary families there is striking difference between good debts and bad debts.

Good debt

Although it would be great to go through life without owing anyone anything, unless you are incredibly rich you will be unable to buy a home unless you borrow the money through a mortgage. A loan to buy your own home is often viewed as good debt. A mortgage taken out in order to purchase a home will have a long term, possibly up to 30 years. In theory, the value of your home will increase over that time period and the repayments will also cost less in real terms as wages rise over the years.

Of course, this situation can be undermined by a fall in house prices and by increases in the rates of interest which put up the monthly payment. Nevertheless, in stable economic times, a home loan is usually considered to be good debt.

A family and their dog in front of the house which the acquired with a morgtage

As far as the lender is concerned, a mortgage is a good debt because it is backed by the collateral of the property value. So, if repayments stop, as a last resort, the lender can repossess the house and sell it to cover the debt.

Bad debt

A bad debt is one that cannot be recovered. Any personal loan, credit card balance or payday loan could be considered bad debt as the borrower does not have to put up any collateral. Therefore, if the debt is not paid, the lender has no recourse other than taking out a court order to recover their losses.

This is why these types of loans are offered at much higher rates of interest than a mortgage. The risk of default is much greater on a loan with no collateral so the cost of borrowing is much higher.

Whilst lenders can absorb a proportion of bad debts which can be written off their books, individuals can suffer far reaching consequences when they fail to pay off loans. The consequences can have an impact on a credit rating which could cause a minor inconvenience or it might result in bankruptcy or an appearance at court followed by a court order.

Managing & Paying Down Debt
Part 1 American Debt – An Overview
Part 2 Types Of Debt
Part 3 Debt Management – Doing It Yourself
Part 4 Debt Help – Getting The Assistance You Need

About the author

Mark Larsen

Mark Larsen has worked in the finance industry for over 20 years. Over the course of his career, Mark has amassed experience in personal finance and especially short-term lending. He shares his valuable insights on onlinecreditusa.com