The personal financial world of millions of Americans has turned upside-down. Thousands of businesses have shut down – many of them permanently; consumers have been locked-down, and jobs have been lost in the millions. Individuals and families have dipped into their personal savings to tide them over, but those funds can only last so long. In desperation, more people are piling on greater debt.
When in a desperate financial situation, and as a last resort, there’s no harm in taking on more debt. But unless you do it with caution, you’re likely to further aggravate an already precarious situation.
What’s Fueling Debt Mania?
According to the Q3-2020 Quarterly Report on Household Debt and Credit published by the Federal Reserve Bank of New York (the New York Fed), total U.S. household debt increased by around 0.6% - or $87 billion – since Q2. Of concern in that number is the fact that non-housing debt (i.e., mortgages and home loans) increased by $15 billion.
That portion of the total national debt (non-housing debt) now stands at $4.13 trillion, which indicates that individuals and households are adding debt to finance their day-to-day expenses. So, the big question is, what’s encouraging families and individuals to rack up this much debt?
Two things: Federal/state-sponsored stimulus and low interest rates.
The Economy and Your Finances
So, how does government aid, interest rates and what’s happening in the broader economy impact your personal finances? And more specifically, what do they have to do with the unprecedented levels of indebtedness?
According to the U.S. Bureau of Labor Statistics (BLS), the December 2020 unemployment rate was 6.7% - same as the month of Nov-2020 (6.7%), and marginally lower than a month earlier (Oct 2020 – 6.9%). The latest report saw non-farm payroll decline by 140,000 – which meant more individuals are jobless today than there were a few months ago. And, joblessness breeds credit seekers.
Even though the federal government has turned on the taps of financial assistance, through Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSAA), the amount of aid flowing into households isn’t nearly as enough to cover the basics of life. So, what can individuals and households do to bridge the income gap? They turn to taking on more debt to finance household expenditure.
Another factor that’s adding fuel to the great debt mania is the low (and some say, nonexistent) rate of inflation in the economy. As a result, the Fed has drastically reduced interest rates to provide monetary stimulus to the economy – and that’s yet another factor that’s impacting the personal finances of millions of Americans.
Typically, when someone is in a financial crunch, the prudent thing to do is to curb expenditure. But low interest rates mean “cheaper” money for the asking. With CPI in the USA running at just 1.36%, the Fed has set its interest rate at 0.25%. Since commercial banks, credit unions and other money lenders offer loans at rates marginally above the U.S. Fed rate, they’ve been attracting borrowers to cheap money simply because it is “cheap”.
Don’t just look for loans…search for the right one
When in a precarious credit crunch, most individuals start looking for loan options. The usual tendency is to go online and hit up a loan provider’s website, and to start filling out lengthy prequalification forms. Alternately, people desperate for immediate short-term financial relief may visit a pay-day loan provider. And there lies the credit trap:
- Firstly, signing-up for a loan with the first website you visit, or taking on a Pay day loan without exploring other options, deprives you of favorable choices. Without comparison shopping, you’re likely to receive the most unfavorable rate on the market
- Most importantly, many online loan websites run credit checks – which is likely to impact your credit score, especially if you’ve applied for similar loans in the immediate past
So, when you’re in a financial crunch – and it happens to the best of us! - what’s the best option to get the financial assistance you need? Well, the best thing to do is to search for the personal loan that’s right for you – and not one that’s the first available option you find online. Your next question might be: With hundreds of personal financial assistance websites around, how is it possible to scan each one to see what loans they offer?
And that’s where comparison shopping pays off – BIG TIME! Specialist online search engines can scour the internet in less than 60 seconds, and present you with dozens of loan options. Whether it’s a loan for 24-months or 84-months; and whether it’s just $1,000 that you’re looking for, or up to $100,000 – you’ll have scores of offers to review.
While the federal reserve, through low interest rates, continues to push us on a debt-ridden path, there's never been a better time, personally, to "flatten the curve."