Consumers are taking on more debt at a faster rate than they have in nearly 15 years as the economy heats up. But academics and experts worry that low-income and minority consumers are at disproportionate risk of taking on that debt.
Data recently released by the Federal Reserve Bank of New York revealed that consumer debt ballooned by $333 billion in the fourth quarter of 2021, with auto loans and home loans driving much of the growth .
Rising prices for new and used cars forced borrowers to take out larger loans. And they have become necessary purchases as consumers prepare to return to work in offices. Homebuyers rushed to close deals before interest rate hikes pushed mortgage rates even higher. Consumers also seemed encouraged by falling, albeit still high, Covid-19 rates, and were spending more on travel and leisure options such as bars, restaurants, hotels, airfare and fuel.
For consumers who are already living paycheck to paycheck, rising interest rates increase their costs of maintaining a month-to-month balance, straining already strained household budgets. With stimulus and government aid spent, consumers have once again turned to accumulating credit card balances to pay for essential goods, the rising costs of which show no signs of abating.
Banks in turn eased their credit requirements, reduced at the onset of the pandemic-induced recession, to capture booming demand, allowing borrowing to increase further.
“These trends – rising credit card debt, rising inflation and rising interest rates – will affect low-income households the most,” said Ted Rossman, senior industry analyst for Bankrate. “They are more vulnerable initially because more of their salary is spent on essentials like housing, food and transportation, and all of these costs are rising rapidly. They don’t have as much flexibility to cut extras.
Minority and low-income households face the greatest dangers from soaring consumer debt, academics say. Because they are already starting from an extremely disadvantaged position with little or no assets, when they take on these burdens, it sends their debt-to-equity ratio skyrocketing relative to other borrowers, the academics say.
The ratio of consumer debt to durable consumption, a measure of what people owe relative to the physical assets they have, breaks down sharply along racial lines.
For blacks it’s more than 125%, Latinos 70%, other or more races around 100%, and for whites it’s just over 50%, according to data compiled by professor Christian Weller. in public policy and public affairs at the University of Massachusetts, Boston, and senior fellow at the Center for American Progress, a progressive think tank.
“It’s risky debt,” he said. “It’s an income risk for people who have borrowed money.”
Borrowers take out loans to buy a car so they can go to work or go to college, essentially an investment or bet that the car or degree will earn more than it cost. But Weller explained that minority and low-income borrowers are at greater risk of being laid off or not completing college for a variety of reasons.
Black students had the lowest completion rate among students who started at four-year public institutions, according to research from the National Student Clearinghouse Research Center, only 45.9%. Among Hispanic students, the completion rate was 55%, white students 67.2%, and Asian students 71.7%.
During the Covid pandemic, white unemployment fell faster than black unemployment and a higher percentage of black workers report having been permanently laid off, according to data from the Bureau of Labor Statistics analyzed by RAND Corp. It’s not just the pandemic either. Historically, studies show Blacks are the last to be hired in times of growth and the first to be laid off in times of recession.
“The group that consistently owes far more than they own are African Americans,” Weller said, citing his analysis of Federal Reserve data.
For example, when buying a new car, “they have to go into more debt to buy the car, and they may go for a lower quality car, so the loan-to-value ratio is worse initially”, did he declare.
Advocacy groups say rising consumer debt only adds to the heavier burdens borne by minorities, low-income populations and other historically disadvantaged populations who face a systemic lack of access to affordable credit. .
“The economic impacts of this crisis show how communities of color are disproportionately affected by structural inequalities that exacerbate the impact of declining incomes, stagnating wages, lack of savings, declining credit ratings, rising unemployment rates and a host of other issues,” Ellen said. Harnick, executive vice president of the Center for Responsible Lending, a nonprofit consumer advocacy group.
“As inflation and consumer debt rise rapidly, these Americans will likely find it harder to pay for housing, food, transportation and other necessities, or acquire funds to support their small businesses. impending end to Covid-related government support programs is likely to drag struggling families back into the debt trap of predatory lenders who offer easy money on outrageous interest terms that often lead to further financial stress and hardship. abusive debt collection efforts.