Young Americans have been urged to borrow money for everything. They ask for finance to study in college, purchase a house and buy cars. Many Americans use credit for everyday purchases as well. Loans are made sweeter through disbursal of credit cards carrying low interest rates. The average American is bombarded with cold called auto loans and new mortgages. The insistence on borrowing has changed family finances too. At one time, American families counted the money at their bank. Now monthly cash flow reigns supreme. The aim is to make more money come in than going out. The result of such government policies is that the new generation (Generation X) are now heavily debt ridden.
Price to pay
There is indeed a cost associated with such household debt. A majority of the people understand-often via a traumatic experience- that debt can increase pain if there is no commensurate growth of income. It is another way of saying that a rise in leverage increases the risk. Unanticipated low inflation is yet another risk. The latter can cripple debtors. The phenomena of low inflation involves minimal change in the value of the dollar, and borrowers cannot enjoy benefits of making repayments with cheaper dollars which are a fallout of inflation.
According to research done by St. Louis’s Federal Reserve Bank, Generation X-those who were born any year from 1965 to 1980 aggressively borrowed before financial crisis. No wonder that their cumulative debt continues ton remain the biggest until now when expressed in percentage terms across all the age groups. Aggressive borrowing was also done by millennial.
Debt brings with it less optionality as well. A young person with a healthy bank account has a large number of choices. He or she can start a business or simply try for a grad school. However, for a person saddled with huge debt, he or she is forced to take a job to pay off the loans. Debt reduces option value. This is due to borrowing constraints. It is hard to take on more debt to pay off older debts. You are also forced to opt for a compromised life style- one that allows you to repay and not a quality of life you actually want. Debt has a binary structure. You will be a defaulter even if you miss one single payment. Your credit rating suffers and penalties are foisted on you. It means even a little risk can have intolerable consequences for individuals in heavy debt.