To go along with last year’s robust economy, U.S. consumers made robust use of debt, according to a 2019 study by Experian. Total consumer debt in America reached $13.3 trillion at the end of 2018, which is more than 10 percent higher than three years ago.
Experian’s study does a great job of breaking down the debt so we can delve into the details, looking at what Americans are doing to amass all this debt. And that’s the prerequisite to knowing what to do about it.
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Asset-Based Debt
Both mortgage balances and auto loan balances are at record highs. Mortgages now total $9.4 trillion. Nearly a quarter of all consumers have a mortgage. Mortgage balances increased despite a slowing of home sales from 2017 levels.
Auto loans are at a record $1.27 trillion, with nearly one-third of all consumers having an auto loan. Auto sales have been very strong for the past couple years, so record loan balances shouldn’t catch anyone by surprise.
The largest growth in auto loans was for Gen Z consumers, followed by millennials. The average monthly payment on a new car loan stands at $530, while the average for used cars is $381. Yikes!
Non-Asset Based Debt
Here we’ll take a look at credit card debt, student loans, and personal loans.
Note that the line between asset-based debt and non-asset-based is blurry. Some personal loans are secured; also true for a very minor portion of credit card debt (secured cards).
And many people would argue that education is an asset, but it’s not one they can repossess, so the debt itself doesn’t qualify as asset-based.
Credit card debt stands at a record $834 billion. Total credit card debt is up about one-third across the last three years. Sixty percent of U.S. consumers have at least one credit card; 40 percent have at least one retail card. The average consumer with a balance owes $4,293.
Student loans are increasingly becoming a problem for many consumers.
The total amount of outstanding student loans has doubled across the last 10 years and now stands at $1.37 trillion.
Fourteen percent of consumers — 43.2 million people — owe on student loans, with an average outstanding balance of $22,600 and an average monthly payment of $357. Student loan debt is second only to mortgage debt in the U.S.
Personal loans had a surprisingly good year in 2018. Balances soared nearly 12 percent to $291 billion. Personal loans can be either secured or unsecured and are often used to finance large purchases or to consolidate debt.
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The total number of outstanding loans increased by 16 percent, with nearly 11 percent of consumers now holding one or more personal loans.
Culture of Debt
America has become a nation and culture of debt. If there’s something we want, we charge it, often without sufficient thought to the ramifications of assuming additional debt. Sometimes we frame our wants as needs, providing ourselves some mental justification of our purchases as a necessity rather than a want.
The past year saw very positive growth in the U.S. economy, coupled with strong consumer confidence. Unemployment hit the lowest level seen in nearly 50 years. The increase in debt seems out of line with a strong economy.
But perhaps not. Some debt correlates positively with a strong economy. Consumers purchase far more new automobiles when the economy is strong than they do when it’s weak.
The growth in personal loans may also have a story to tell. Two primary reasons people take out personal loans are large purchases and debt consolidation.
The 16 percent increase in the number of outstanding personal loans is huge. That’s a lot of large purchases, perhaps also a lot of debt consolidation. There may also be a boost in this category due to changes in home-equity loan deductibility as a result of tax reform.
Good economy or bad, Americans find ways to use debt. The debt numbers, however, are aggregate. They’re what we’re doing collectively. The solutions tend to be personal, not collective.
How to Deal With Debt
Avoidance is the best strategy, but it’s not always a practical one. We need to recognize that debt is, in general, a part of our lives.
Once we recognize that the cost of living debt-free, in terms of inconvenience and other factors, is not a cost most are willing to bear, then we need a different approach. We need to understand and use debt effectively and moderately in order to maximize our financial potential.
Financial Literacy
Financial literacy is the primary tool we should be using. There are lots of debt strategies and debt reduction techniques. But finance doesn’t occur in isolated silos.
Each financial change effects other areas of our financial lives. Learning about debt and how to manage debt is certainly important. But learning about debt without understanding cash flow, taxes, or retirement planning means we’ll still be running short of being very effective with our money — and it also means we will continue to be at risk for future debt problems.
Living Within Our Means
Living within our means is something our debt levels indicate we’re not good at. We need to get better. Certainly, we need to get better collectively. We accomplish that by getting better individually. We accomplish that by working with a formalized budget and not accepting unnecessary debt as part of our lives.
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Planning Ahead
And we need to be better at planning ahead. We incur a lot of debt because we’re making purchases in the present that we didn’t save for in the past.
Absent change, the cycle will repeat itself in the form of debt for future purchases that we’re failing to save for in the present.
We all know we’ll need another car down the road, but how many of us are saving for that next car so we aren’t one of the one-third of all consumers with an auto loan.
We need to have our emergency funds in place. Most Americans are ill-equipped to deal with even a relatively minor emergency without resorting to debt. And that doesn’t need to be.
We’re going to have future unexpected expenses. But they’re really not unexpected — we can expect the expenses. We just can’t predict what they’ll be. Having an emergency fund can help us avoid incurring high-cost debt to deal with situations that will undoubtedly occur.
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Debt is a part of our financial lives. We need to recognize that and plan for it. We need to be better stewards of our financial resources. And we need to work within the credit system. We need to understand what goes into our credit scores and how to manage and improve them.
We can’t easily eliminate debt. But we can, collectively, get a lot better at managing it and doing better financially. And we do that by taking steps individually.
