Americans just do not learn and have “short term memories”. In a very bad sign for the economy, the total debt help by families will soon exceed that held in 2007, before the great recession started. Nerdwallet reports that consumers will soon owe about $12.5 trillion dollars to all sorts of lenders.
This could not come at a worse time. With the federal reserve now in a cycle of increasing short term interest rates, as they just did on December 14, 2016, and with long term interest rates now at a two year high (as reflected in the 10 year bond) and increasing weekly, the amount of money that people will be spending on interest payment to service these debts will be increasing, often at a rapid rate.
This is very bad news for almost every single American. May it be one of the things that could lead to the next recession? Time will tell.
As we approach the end of 2016, according to the latest study, total average consumer household debt levels stand at $132,000. The break up is as follows. These will be average levels for each household based on the type. So some people will of course owe more money and others owe less than these average levels. For anyone looking to get advice on what they can do, there are many ways to get help with debts.
- –Credit cards stand at over $16,000. This is arguably the most problematic (and controllable) form of borrowing, as it is often unnecessary and it will be impacted more than any other type by the expected federal reserve interest rate increases.
- -Homeowners owe over $172,000 on their mortgages. Hopefully most people locked in a low interest rate on their home loan in 2016, and hopefully they took advantage of historically low mortgage rates.
- -The average family now owes over $28,000 on their auto-loans. This is also very unfortunate as it too is often unneeded and controllable.
- –Student loans stand at almost $50,000 according to Nerdwallet.
The total debt may even exceed that $12 trillion level as it is hard to quantify some of the other forms of “non-traditional” lending. It is difficult to account for Americans that have used such forms of borrowing as peer to peer lenders or title loans, to name but a few. As there were many more options for Americans in 2016 to get themselves into trouble.
As you can see, Americans are in a lot of debt. While the federal reserve has only increased short term term rates once in 2016, the pace of increases is expected to pick up. There are expected to be at least 3 increases in 2017, if not more. As with inflation starting to perk up, and the rolling 12 month average has exceeded the inflation target of 2%, the federal reserve may have no other option.
What impact do interest rate increases have on average household debt
If the federal reserve continues on their path of increases, there will be an increasing impact to those families that have borrowed money. First and foremost will be the hit to their credit card payments. Each and every increase will result in a bank increasing the APR on a credit card, so more of your monthly payment will go to pay interest on your account and less of the payment will go to the principal balance.
Mortgages are also impacted as well. This is especially true of anyone with an adjustable rate mortgage (ARM). Depending on the terms and conditions of a home loan, each and every time the federal reserve hikes rates in 2017 your monthly payment will go up.
Individuals with more traditional 15 or 30 year mortgages will not see a direct impact. But what may happen is that if inflation perks up, the interest rate on the 10 year bond will continue to spike. This will make mortgages more expensive, and thereby limit the affordability of people seeking to buy a home. Then, over the mid-long term, this will slow down the housing market and in worst case, the value of some homes may decline.
Anyone seeking to take on a new student or auto loan will be impacted too. They can expect to be presented with a higher interest rate. However the impact to people that currently owe money is expected to be minimal at best.
It is very unfortunate that Americans once again are in record debt, and 12 trillion dollars is a lot of money. While there were many reasons for the great recession, excessive household debts were definitely one of them. So what this study helps to show is that Americans want back to their free spending ways over the last few years (as the economy improved) and now comes the payback for each consumer. After all, as history shows us, history often does repeat itself.