If you've taken out a loan to make a major purchase recently, you're probably not alone. Consumer debt is at its highest level in a decade following the recession in 2008, according to New York Times. Although debt and recession aren't usually used positively in the same sentence, a high-level of consumer debt actually signals confidence in the economy today.
While this is a good sign for the economy overall, the implications of debt at the household level can vary from family to family. Financial experts quoted in the Times do warn that debt can have its downside too.
Early downsides to high levels of debt
Experts point out three downsides to high levels of consumer debt:
- Families are spending beyond their income.
- Repayment delays formation of a household and financial independence.
- Increased chances of default.
For many families, there is a balance to be found between debt, spending and saving, and maintaining equilibrium is not easy. While a family may be focused on growth through taking on debt today, that should soon shift to repayment.
The latest numbers show that American consumer debt currently sits at more than $12 trillion dollars across all households. With 125 million households in the U.S., according to Statista, that means each family shares nearly $100,000 in debt. The three largest sources of debt today are:
- Mortgages and home equity loans
- Student loans
- Auto loans
Effective debt payment strategies
Facing nearly six figures in debt can seem daunting, but there are three strategies families can employ to reduce the red.
1. Think of repayment as a percentage, not a dollar amount.
An academic study showed that consumers are more motivated to pay off debt when they view it as a percentage instead of a whole dollar amount. For example, if contributing more money to one account will pay off a higher percentage of debt, then repayment can feel worthwhile.
2. Pay off accounts with higher interest rates first.
Often called the "snowball plan," focusing on accounts with the highest interest rates first can reduce the amount of money paid over time. An alternative to this would be to start repaying accounts with the lowest amount of debt to stay motivated toward repayment.
3. Speak with an attorney.
When debt reaches overwhelming levels and repayment doesn't seem like an option, bankruptcy or debt relief are two ways to seek a fresh start. However, consumers should be aware of the nuances of each process and which one might provide the best financial prospects for the household.
Household debt can be a cause for worry. Therefore, families that are focused on repayment or relief should be aware of the financial strategies and legal options available to them to minimize the downsides of debt.