Have loans become more necessary?

Americans have been taking out loans of one form or another even more in recent years. This trend is visible in the record high amount of car financing that has been provided by lenders in the year of 2016, crossing the one trillion dollars mark for the first time in history. The average household debt relating to credit card payments has also risen to a new high of £16,048 in the same year. According to a research study conducted by Pew last year, about 12 million Americans have taken out Payday loans to finance their needs, majority of this has been spent on everyday expenses like rent, groceries, bills among other necessities. The age group, according to financial analysts, that takes out the most loans is between the ages of 24 and 40 years old. About 83% of adults in this age group have a credit card and the same group makes up the majority of Payday loan borrowers.

Some analysts have pinned this increasing trend of lending to better economic stability in the industry, others have attributed it to rising inflation, while still others say that increasingly Americans are being lured to the luxuries of life. These opinions will be explored and evidence from studies applied to them to gauge if one, or even all of them are true and to what extent.

National Economic Stability:

Ever since the recession of 2008 began showing signs of recovery in around 2012, the rate of credit taken out by borrowers on their credit cards has been steadily on the rise. Data released by the Federal Reserve for Outstanding Revolving Debt, the amount of revolving debt in 2012 was £846 billion. This amount has risen to £952 billion in the year of 2016. Revolving debt is unsecured debt and is essentially a reoccurring credit line extended to borrowers that has to be paid off at regular intervals.

These figures show and increasing amount of loans taken out by the American public in recent years, however, as shown in the Quarterly Report on Household Debt and Credit of the Federal Reserve Bank of New York, the average credit card holder has a better credit rating compared to that of 2007. This is a strong indicator that even though more credit is being extended by lenders, borrowers have an increased capacity of paying off their loans.

Inflation as a Reason for Increase in Borrowing:

Although inflation has been cited by several analysts as a reason why the amount of lending has been on the increase, data from the U.S. Bureau of Labor Statistics has shown that since 2012, inflation has been declining. As a matter of fact, taking the figures form the data, the inflation is about half that of what it was in 2012. The inflation rate in the U.S. is an indicator of the prices that consumers have to pay for any products or services, which not only includes the producer’s price, but also any associated taxes.

Even though the wage growth is at the same level as it was in 2012, it defies reason to believe that the miniature current inflation rate would be a significant factor in the increasing amount of loans taken out by consumers.

Lure of Luxury:

Financial analysts generally agree that the modern consumer’s lure towards a more luxurious life has a major impact on the levels of loans being provided by lending companies. However, while these analysts might agree on this point, they dispute the extent of its impact. Some market observers say that in this environment of stability of the recent economic recovery, borrowers like to experience the finer aspects of life. The surge in car finance loans being approved for more expensive cars is a good confirmation of this opinion. As a matter of fact, the average borrower now lends £31,831 for new cars and £16,800 for used cars, an increase of more than 3% compared to 2015.

This increase in taking out loans for cars, however, does not mean there is a significant increase in the wealth people possess. According to one financial analytical company, buyers are simply extending the duration of their financing contracts to bring down the premium costs. This would result in easier individual repayments over a longer period of time. Now the average car financing contract can last up to six years or more, and this trend seems to be on the incline.

Although buying more expensive cars is an indicator of a more luxurious life style adaptation by the average consumer, other factors also indicate that an increasing amount of borrowers are taking out loans for improving their general life experiences. According to a survey conducted by Pew in 2015, about 10% of all Payday borrowers took out a quick loan for luxury, non- essential spending like vacations, presents, decorations or simply for entertainment purposes.

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