Higher debt risk for households with lower incomes and minorities

American consumers are taking on more debt in the last 15 years than they did in 15, putting consumers of low income and minorities at greatest risk.

Higher debt risk for households with lower incomes and minorities

As the economy heats up, consumers are taking on more debt than ever before. Experts and academics fear that consumers of lower income and minorities are at greater risk from taking on this debt.

Recent data released by the Federal Reserve Bank of New York showed that consumer debt grew by $333 billion during the fourth quarter of 2021. This growth was largely driven by car loans and home loan originations.

The rising cost of new and used cars forced borrowers to borrow more money. They were necessary purchases because consumers are returning to work. The interest rate rises caused homebuyers to rush to close deals in order not only did they increase mortgage rates, but also made it more difficult for them to get their homes sold. The falling Covid-19 rates encouraged consumers to spend more on leisure and travel options like bars, restaurants, hotels and motor fuel.

Uneven debt

Consumers living paycheck to paycheck are already affected by rising interest rates, which increase the cost of maintaining a balance month to month. This can add to already stressful household budgets. Consumers have resorted to building credit card balances in order to purchase essential goods, even though stimulus and government relief has been exhausted.

To capture the growing demand, banks have eased their credit requirements to allow borrowing to increase further.

Bankrate senior industry analyst Ted Rossman stated that these trends -- higher credit card debt, higher inflation, and higher interest rates -- will most affect low-income households. They are more vulnerable because they spend more of their income on essentials like housing, food, and transportation. All of these costs are increasing rapidly. They are less able to reduce unnecessary expenses.

Racial disparities

Academics state that the most dangerous consequences of the surge in consumer debt are for low- and minority-income households. Academics state that they are already in a very disadvantaged situation with low or no assets and when they take on debt, their debt-toasset ratio will rise relative to other borrowers.

The ratio of consumer debt to durable, which is a measure how much people owe relative to their physical assets, falls sharply along racial lines.

It's higher for Blacks than 125 percent for Latinos, 70 percent for Latinos, and it's lower for other or multiple races than 100 percent for whites, according to Christian Weller, who is a professor of public affairs at the University of Massachusetts and a senior fellow with the Center for American Progress. This progressive think tank also has data.

He said, "It's a risky debt." People who borrow the money run the risk of losing their income.

Borrowers borrow money to purchase a car and go to college. This is essentially an investment in the possibility that the car will be worth more than the cost. Weller said that borrowers with low incomes and minority status are more likely to be laid off or not complete college.

According to the National Student Clearinghouse Research Center research, Black students had the lowest completion rates among four-year public universities. This was just 45.9 percent. Hispanic students had a completion rate of 55 percent, while white students were 67.2 percent and Asian students 71.7%.

According to data from the Bureau of Labor Statistics, white unemployment fell faster than Black unemployment, and a greater percentage of Black workers reported being permanently laid off during the Covid pandemic. This is not only a pandemic. Studies have shown that Blacks are often the last to be hired in growth periods and the first to lose their jobs during recessions.

"The group that owes more than it owns is the African Americans," Weller stated, citing Federal Reserve data.

He explained that when they buy a car new, "they will have to take on more debt and may choose a lower-quality car so the loan-to value ratio is worse."

Wider impact

Advocate groups claim that the rising consumer debt burden only increases the burdens of historically disadvantaged people who are unable to access affordable credit.

Ellen Harnick, executive vice-president at the Center for Responsible Lending (a non-profit consumer advocacy group), stated that the economic effects of the crisis highlighted how communities of color are disproportionately affected by structural inequities.

As inflation and consumer debt rise rapidly, Americans will likely find it more difficult to pay for housing, food and transportation, as well as to obtain funding to support their small businesses. With the imminent end of Covid-related government assistance programs, struggling families will likely fall back into debt traps of predatory lenders offering easy money at ridiculous interest terms. This can often lead to more financial stress and abusive debt collection efforts.

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