Consumer Debt

Financial Dictionary -> Debt -> Consumer Debt

From a macroeconomic point of view, consumer debt is a loan borrowed to fund mainly consumption, not investment. Taking a loan in order to buy household appliances or furniture is an example of consumer debt.

Recently, consumer debt is regarded as a way to improve domestic production due to the fact that the growing demand for consumer goods boosts the level of production.

Still, the cultural prejudice against borrowing is understandable. Historic developments demonstrate that the risk had often outweighed the involved costs. You did not just declared bankrupcy if your expectations were wrong - you also lost your private business, family home, and belongings. For example, credit card borrowing is largely unknown in the Far East because of cultural taboos and beliefs about debt. American culture, on the contrary, overemphasises consumption and encourages excessive spending which leads to higher levels of consumer debt.

Used reasonably, consumer debt generates economic activity and may be fairly useful, however, it can also become a source of trouble if not managed properly. In this case, individuals can accumulate consumer debt to an extent that they are unable to repay their dues. Therefore, a number of debt solution options exist which can be very helpful in such situations.

Debt consolidation is a solution for credit card debt and the payment of various bills - one gets a consolidation loan to pay off the balance on their credit card. Creditors will cut down the interest rates and lower the late payment charges; however, it should be kept in mind that the loan is sometimes taken against collateral such as one's home, and care should be taken for expenses until the debt has been paid off.

Debt settlement is a process in which a company helps you to negotiate the reduction of your outstanding debt by about 40-60%. In return, your creditors will expect a lump sum payment. The disadvantage of this method is that payments will be late. This development will have a negative effect on your credit score.

Debt management involves counseling with a credit advisor who will analyze your finances and prepare a budget to help you repay your debts. The counselor can negotiate on your behalf a cut down on interest rates and late payment fees; however, qualifying for a new credit might take you more time if you choose this option.

A self-repayment plan is the option that will have the best effect on your credit score and will facilitate new borrowing. It is an individual plan that will help you pay off your debt on your own in a timely manner. You do not need professional help, but you will have to follow a tight monthly budget in order to ensure that the plan works as intended.