How Does Consumer Debt Affect Our Economy?
The debt that is carried out by individuals and not by the government is called consumer debt. Consumer debt can be anything ranging from home mortgages, credit card debt, auto loans, and student loans to other loans. It’s also referred to as household debt. Further, consumer debt is there for possession or consumption and not for investment. You can use credit cards and personal loans, the so-called debt instruments, for generating profit. But today people are lavishly using them for consuming and unnecessary purchases. If the number of consumer debt settlement services in the country increases or decreases, it can certainly have both negative and positive effects on the economy. 
Money Multiplier Effect
Consumer debt has one advantage and it has been termed as the money multiplier effect. The calculation behind this concept is that if consumer debt increases, it raises income for a chain of businesses and individuals. One extra purchase ensures more money for the business selling the particular product, its employees and the chain of suppliers. Simultaneously, it generates income for the lender and its employees.
Interest Rates
By fixing the Federal Funds Target Rate, the Federal Reserve in the U.S. mildly controls the interest rate in the economy. This target rate affects the prime interest rate at which banks issue short tern loans to each other. If there is a decline in consumer debt, the Federal Reserve gets alert that consumers are buying minimum products. If this happens the Federal Reserve lowers the Federal Funds Target Rate to encourage buyers to spend and invest. This may have overflowing effects on the economy as lowering interest rates influence business investment, home buying and higher education.
Savings and Investment
It’s certain that consumer debt is absolutely fruitless as it doesn’t create any profit or revenue for the borrower. It’s certain that higher levels of consumer debt mean less saving in 401(k) and less investment. This further reveals that this can transfer the demand from real estate to industries like fast food and entertainment.
Loan Defaults
If consumer debt increases rapidly in the economy and if a huge number of households owe much than their annual income, loan defaults can surely burst throughout the economy. Excessive defaults can paralyze the banks which in advance can diminish the supply of debt funding in the economy. If these occur, people withdrawing their money will close the accounts leaving little money in the lending system. And this in turn will slow down the spending behaviour and investment.
