Some consider all debt incurred for anything else other than investments unwise or detrimental to the economy, while others believe that consumer credit is beneficial to the economy. Historically, across many cultures, being in personal debt was considered almost immoral. More recently, an alternative analysis might view consumer debt as a way to increase domestic production, on the grounds that if credit is easily available, the increased demand for consumer goods should cause an increase of overall domestic production. The permanent income hypothesis suggests that consumers take debt to smooth consumption throughout their lives, borrowing to finance expenditures (particularly housing and schooling) earlier in their lives and paying down debt during higher-earning periods.
Both domestic and international economists have supported a recent upsurge in South Korean consumer debt, which has helped fuel economic expansion. On the other hand, credit card debt is almost unknown just across the sea in Japan and China, one because of long standing historical biases against personal debt, the other because the economy is still underdeveloped. Theoretical underpinnings aside, personal debt is on the rise, particularly in the United States and the UK.
The most common form of consumer debt is credit card debt, payday loans, and other consumer finance, which are often at higher interest rates than long term secured loans, such as mortgages. The interest rate charged depends on a range of factors, including the economic climate, perceived ability of the customer to repay, competitive pressures from other lenders, and the inherent structure and security of the credit product. Rates generally range from 0.25% above base-rate, to well into double figures. Consumer debt can be associated with Predatory lending, although there is much debate as to what exactly constitutes predatory lending.
Long-term consumer debt is often considered fiscally suboptimal. While some consumer items may be useful investments that justify debt (such as automobiles, which are usually but not always exempted in discussions of consumer debt, and business suits), most consumer goods are not. For example, incurring high-interest consumer debt through buying a big-screen television "now", rather than saving for it, can not usually be financially justified by the subjective benefits of having the television early. On the other hand, personal finance advisors like Robert Kiyosaki encourage a more liberal attitude towards taking on debt if it can be leveraged into a small business or real estate. This higher-risk, possibly high-outcome, "personal-finances-as-a-game" attitude runs counter to the traditional mores of rising slowly through the ranks of a company through discipline and hard work, but may have increasing validity in an age of globalization.
In many countries, the ease with which individuals can accumulate consumer debt beyond their means to repay has preciptated a growth industry in debt consolidation and credit counseling.
Statement by Janet L. Yellen, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Regulatory Relief, Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 24, 1996
Sep 01, 1996; I am pleased to appear before this subcommittee today to discuss trends in consumer lending and the Federal Reserve Board's view...