Consumer debt refers to any money you borrow for personal, family, or household purposes. It includes credit card debt, student loans, auto loans, mortgages, personal loans, and payday loans.
White “debt” can have negative connotations, having consumer debt isn’t necessarily a bad thing. Borrowing money allows you to achieve your goals, such as buying a house or going to college. However, consumer debt can become a burden if you borrow too much or for the wrong reasons.
Unfortunately, many Americans are currently saddled with high levels of debt. According to a recent credit and loan review by Experian, the average person in the U.S. had a total consumer debt balance of $101,915 in 2022. This number includes mortgages, credit card balances, auto loans, personal loans, and student loans.
If you’re curious about consumer debt or worried that you may have too much, read on. What follows is an in-depth look at the different types of consumer debt, including how each can help — or hurt — your finances, plus how to pay off high levels of consumer debt.
What Is Consumer Debt?
Consumer debt, as its name implies, is debt held by consumers, meaning private individuals as opposed to governments or businesses. It includes debts you may already have or might seek in the future — credit cards, student loans, auto loans, personal loans, and mortgages. It doesn’t include business loans or lines of credit or business credit cards.
Consumer debt products are offered by banks, credit unions, online lenders, and the federal government. They generally fall into two major categories: revolving debt and non-revolving debt.
With revolving debt, you repay your debt monthly (credit cards are a prime example). With non-revolving debt, you receive a loan in one lump sum and then repay it in fixed payments over a defined term. Non-revolving credit typically includes auto loans, student loans, mortgages, and personal loans.
Consumer debt can also be broken down into secured vs unsecured debt. Secured debt is debt backed by an asset (such as a home or car) used as collateral. If the loan isn’t paid back, the lender has the option to seize the asset. Unsecured debt, on the other hand, does not require collateral. The lender simply relies on the borrower’s ability to repay the loan.
The Different Types of Consumer Debt
Consumer debts vary widely in terms of how they work, their terms, and their impact on your financial well-being. Here a closer look at some of the most common types of consumer debt.
Mortgage Debt
Mortgage debt is the most common (as well as the largest) type of debt in the U.S. This type of consumer loan is used to purchase a home and the home is used as collateral.
Mortgages are installment loans, which means you pay them back in a set number of payments (installments) over the term of the loan, typically 15 or 30 years. Mortgage interest rates are usually lower than other types of consumer loans, and the interest may be tax deductible if you itemize your taxes.
If you make your payments on time, a mortgage can have a positive impact on your credit profile, since it shows you are a responsible borrower. If you stop making payments on a mortgage, however, it can negatively impact your credit. Plus, the lender can begin the foreclosure process, which typically includes seizing the property and selling it to recoup its losses.
Student Loan Debt
Student loans are unsecured installment debt used to pay for education expenses, such as tuition and room and board. They are offered by federal or private lenders and issued in one lump-sum payment. The borrower is then responsible for making repayments in regular amounts, typically after they graduate or are no longer in school.
Student loans are often one of the first debts consumers take on and can be an important way to build a positive credit history, provided you make on-time payments. Interest rates vary by lender. If you get a student loan from the U.S. Department of Education, the interest rate is set by the federal government and will remain fixed over the life of the loan.
Depending on your income, interest paid on student loans may be tax-deductible up to certain limits.
Auto Loan Debt
Auto loans are secured installment loans used to purchase a vehicle. These loans can have varying terms and interest rates, and the vehicle serves as collateral for the loan. You can get an auto loan through a bank or through a lender connected with a car dealership.
Unlike a house, a car depreciates in value over time. As a result, you, ideally, only want to take out financing for a vehicle if you can get a low interest rate. Some car companies offer low- or no-interest financing deals for individuals with good credit.
You get the proceeds of an auto loan in one lump sum then repay that amount, plus any interest, in a set number of payments (typically made monthly) over an agreed-upon period of time, often three to six years. If you stop making payments, the lender can repossess your car and sell it to get back its money.
Like other types of consumer loans, making on-time payments on your auto loan can help you build a positive credit history.
Personal Loans
Personal loans are consumer loans that individuals can use for a wide variety of purposes, such as debt consolidation, home improvements, or emergency expenses. You can get a personal loan with an online lender, bank, or credit union. They typically have fixed interest rates and set repayment terms, often two to seven years.
Personal loans are typically unsecured, meaning you don’t need to provide any collateral. Instead, lenders look at factors like credit score, debt-to-income ratio, and cash flow when assessing a borrower’s application.
Once approved for a personal loan, you receive a lump sum (which can be anywhere form $1,000 to $50,000 or more) and start paying it back, plus interest, in fixed monthly payments over the loan’s term. On-time loan payments can help build your credit, but missed payments can damage it.
Recommended: Typical Personal Loan Requirements Needed for Approval
Credit Card Debt
Credit card debt arises from using credit cards to make purchases or cover expenses. This type of debt is revolving, meaning you don’t have to pay it off at the end of the loan term (usually the end of the month). If you carry a balance from month to month, you pay interest on the outstanding amount.
Credit card debt is an unsecured loan, since it isn’t tied to a physical asset the lender can repossess to cover the debt if you don’t pay your bills. Interest rates vary depending on the card, your credit scores, and your history with the lender, but currently average around 24%.
To remain in good standing, you’re required to make a minimum payment on your balance each month. However, only paying the minimum allows interest to accrue, which can make the debt increasingly harder to pay off. As a result, credit card debt is often the most problematic type of debt for consumers.
A long history of making on-time payments can have a positive impact on your credit profile, while missing and late payments (and using a large amount of your available credit line) can have a negative impact on your credit.
Payday Loans
Payday loans are a type of short-term credit offered to consumers looking to get access to cash fast. Generally, these loans are for relatively small amounts of money ($500 or less) and must be repaid in a single payment on your next payday, hence the name. Payday loans are typically available through storefront payday lenders or online.
Although these fast-cash offers can be tempting, the high cost associated with them make them a last resort. A typical two-week payday loan will charge $15 for every $100 you borrow, which is the equivalent of a whopping 400% annual percentage rate (APR).
Generally, payday loans are not reported to the three major consumer credit bureaus, so they are unlikely to impact your credit scores.
Pros and Cons of Consumer Debt
There are both benefits and drawbacks to consumer debt. Here’s a look at how they stack up.
Pros of Consumer Debt
• Access to immediate funds Consumer debt allows individuals to make large purchases (like a home or car) or cover expenses (like a college education) when they do not have the necessary cash on hand.
• Building credit history Responsible borrowing and timely repayments can help establish and improve an individual’s credit history and credit score.
• Emergency financial support Consumer debt, such as a personal loan, can provide a safety net in unexpected situations when someone needs funds immediately.
Cons of Consumer Debt
• High interest rates Many forms of consumer debt, such as credit card debt or payday loans, carry high interest rates, making them costly in the long run.
• Risk of overborrowing Without careful financial planning, consumer debt can lead to excessive borrowing, making it difficult to manage monthly payments and potentially causing financial stress.
• Negative impact on financial goals Excessive consumer debt can hinder individuals from achieving long-term financial goals, such as saving for retirement or buying a home.
Getting Out of Consumer Debt
To get out from under unhealthy levels of consumer debt, consider the following steps:
• Assess your debts You might start by making a list of all your debts, noting balances, interest rates, and minimum monthly payments. This will allow you to see where you stand and make a plan for debt repayment.
• Create a budget Next, you’ll want to assess your average monthly income and expenses to determine how much you can allocate towards debt repayment each month. At the same time, you may want to look for ways to cut back on nonessential spending; any funds you free up can go towards extra payments.
• Prioritize repayment If you have multiple high-interest debts, you may want to focus on paying off the highest-interest debt first, while making minimum payments on other debts. Or, you might focus on repaying the debt with the smallest balance, making minimum payments on all your debts. Once that is paid off, you move on the next-highest balance.
• Explore debt consolidation options Consider consolidating multiple debts into a single loan to simplify repayment and, ideally, save money. One way to do this is through a debt consolidation loan, a personal loan that may come with lower interest rates than your existing debts.
• Negotiate with creditors Another option is to reach out to your creditors to see if you can negotiate lower interest rates, extended payment terms, or possible debt settlement options.
• Seek professional help if needed If you are struggling with debt, you may want to consult a nonprofit credit counseling service. Credit counselors help you go over your debts to devise a plan for repayment, and they can also help you with budgeting and other personal finance basics.
The Takeaway
Consumer debt is debt you take on for personal, rather than business, reasons. But all consumer debt is not created equal. Some debts, such as mortgages or student loans, can be characterized as “good” debts, since they can benefit your long-term financial health. Other debts, like high-interest credit card debt or payday loans, on the other hand, can be considered “bad debts,” since they can put your financial health at risk.
If you’re having trouble paying off your consumer debts, you may want to consider debt consolidation. With a low fixed interest rate on loan amounts from $5K to $100K, a SoFi personal loan for debt consolidation could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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