In: Root » » Loans and mortgages
Debt Millstone Lower income households faced a far more difficult adjustment. For a quarter century, these households benefited from steadily increasing access to credit. By borrowing more, they could supplement their constrained incomes to maintain their spending at a relatively high level. The subprime financial shock signified the end of such free-flowing credit. Lower income households had little choice but to match their spending with their incomes; their living standards would inevitably suffer. It was tough to get a loan in the early 1980s. For most households, that period's double-digit interest rates made borrowing prohibitively expensive. Credit cards were still new (they were not mass-marketed until the late 1960s) and still were used by a minority of households. Vehicle loans lasted at most three years and were exclusively intended for car buyers with pristine credit. Mortgages were almost entirely plain-vanilla 30-year, fixed-rate loans. Over the subsequent 25 years, the availability of credit ballooned, powered by steadily declining interest rates, rapid financial innovation, and government policy. The lower rates were vital to increased borrowing as households could take on more debt and not have to make larger payments. Lenders also extended the length of loans to keep payments down; minimum payments on credit cards fell, most car loans evolved into 5-year loans, and 40-year mortgages became increasingly common. Credit scoring, direct marketing, and securitization came into their own, and lenders grew emboldened to provide credit to new groups of consumers. Risk management techniques improved dramatically, enticing lenders to provide more credit to less creditworthy borrowers. There was also mounting regulatory pressure to provide more credit to minority and disadvantaged borrowers. Ongoing changes to the bankruptcy laws making them steadily more lender-friendly may have also empowered lenders to extend more credit. While all income groups took on more debt, lower income groups were particularly burdened. In the fifteen years between 1989 and 2004, households in the bottom 20% of income earners increased their indebtedness by 3.4 times.16 Those in the next lowest 20% bracket boosted their debt levels 2.2 times. Households in the top 20% of income earners also borrowed more, but their debt increased only 1.3 times. Some of this reflects a judicious use of credit by households getting their first taste of it. Higher income households have long had the luxury of financing purchases of big-ticket items a car, a dishwasher or even a big-screen TV that they will consume over a long period. They use debt to more efficiently pay as they consume laying out cash (via debt repayment) as they go. Of course there are interest charges included in this plan, but for many it is well worth it. There is no reason why lower-income household shouldn't enjoy the same privileges, and that's how many have used their access to credit. Over time, lower-income households have increasingly used debt to supplement their constrained and volatile incomes. It's not hard to understand why: After inflation, incomes for those on the bottom rungs of the income and wealth ladders barely grew after the early 1980s, and didn't grow at all through the late 1990s to the mid-2000s. While globalization including immigration and trade had been a boon to the overall economy, it was hard on those with lesser skills and education. In the competition with cheaper labor from all corners of the world, lower-skilled U.S. workers were losing. Borrowing more took the financial sting out, and while debt burdens were getting weightier, these households could manage it as long as lenders continued to extend them credit. By the time the subprime financial shock hit, debt loads were at record highs. The average American household was paying almost a fifth of its after-tax income on financial obligations everything from the mortgage payment to the auto lease to avoid going delinquent on those obligations. For subprime homeowners, who were forking over more than 35% of their after-tax income to meet their obligations, this was an overwhelming burden. It all came undone in the housing crash and the subprime financial shock. Many poorer households were now completely cut off from credit; and while lending to this group would eventually be reborn, these households would no longer be able use credit as a ticket to a better lifestyle.
|
|||||||||||||
Disclaimer
1) E-articles is not responsible for the information contained by this article as well for any and all copyright infringements by authors and writers. E-articles is a free information resource. If you suspect this article for any copyright infringement, please read the terms of service and contact us or use the "Report this article" button on this page to investigate the problem.
2) E-articles is not responsible for inaccuracies, falsehoods, or any other types of misinformation this article may contain and will not be liable for any loss or damage suffered by a user through the user's reliance on the information gained here. |
|||||||||||||
