The Debt Burden And How To Make Sensible Financial Decisions

There is always a question about debt levels and the sustainability of them. Current household debt levels in the United States recently reached a historic high of $12.84 trillion in Q2 2017. Consider that the previous high was reached in 2008 when it was $164 billion lower. The increase over Q1 2017 is some $114 billion. The rising debt levels in the US is coming from increased automobile debt, high mortgage debt, and increased levels of credit card debt. It is the last category that remains the most concerning. With sharp increases of 2.6 percent, credit card debt levels have risen sharply in the US. Year-over-year, the total outstanding value of consumer debt increased by $552 billion.

Fed Action On Interest Rates

There are mounting concerns about the Federal Reserve Bank’s actions, notably raising interest rates. According to the CME Group FedWatch tool, there is a slim likelihood of interest rates rising in 2017. With just three meetings of the FOMC remaining the probability of a rate hike is quite low (the December 13th meeting has a 31.3 percent probability of a rate hike, the highest of the three).

These interest rate probabilities present borrowers with much-needed relief over the short-term. With US interest rates still at multi-year lows, personal loans remain affordable to consumers.

While the Fed mulls its prospects, a rate hike would boost the value of the US Dollar and restore confidence to equities markets. However, it would also have a negative effect on personal loan applications, mortgages, auto loans and investment loans in the country.

Impact of Interest Rate Hikes On Consumer Loans

If interest rates rise on consumer loans, such as personal loans, this will place an incremental burden on household borrowing and repayment options. Higher interest rates also lead to higher debt defaults over time. This is particularly true of credit card borrowing, which is associated with high APRs in the region of 15– 28 percent, on borrowed money. 

Economist David H. Levy routinely alludes to the rise in credit card debt as a source of concern. "Many bad credit lenders are approving people for loans, but rising interest rates are crushing their ability to repay many of these loans," he said. "With falling real wages, a weaker dollar and stagnant inflation rates, rising interest rates are not assisting families. While it would be disingenuous to extrapolate beyond single-digit defaults, rising credit card debt is concerning. We have seen falling credit scores for automobile loan borrowers and mortgage loan borrowers. This comes hot on the heels of a customer-friendly reconfiguration of credit score calculations in the US."

Locking In Low-Interest Rates On Loans

The current levels of US household debt are untenable, with mortgage loans comprising $8.69 trillion as of the end of June 2017. The outstanding debt figure is up $329 billion year-over-year, while there was a concomitant $26 billion decline year-over-year in home equity lines of credit. Automobile loans and student loans make up a massive component of nonhousing debt, with figures of $87 billion and $85 billion respectively. It is easy to understand how rising interest rates can quickly add interest to these already inflated figures. You will be best served by taking advantage of low-interest rates now before the Fed acts towards the end of 2017.