The Economics Of Consumer Loan


A consumer loan is a loan that is held by individuals and is in the form of student loans, credit card debt, personal loans and mortgages. This loan is also known as a household debt.
Many individuals incur a large amount of debt in consumer loans which in turn, reduces the amount of money they can take home.

A viable economy is one in which consumers are spending, so the health of the economy is linked to the amount of money consumers have available. In cases where consumers have less money due to repayments on their loans, the economy of a country may result in an economic recession. Many governments adopt policies such as lowering interest rates and taxes in efforts encourage consumers to borrow more and increase spending.

The economy is also affected by mortgage repayments, where individuals use their credit cards to repay mortgages. This leads to more debt on their credit cards and as a result, default payments.

Consumer loans from can be classified in two categories; positive and negative. A good consumer loan is one that will grow in value and may generate income. An example of this is a mortgage loan because it has a lower interest rate and the home increases in value over time. A loan with a low rate improves the economy because it makes more money available to the consumer for spending. A negative loan is one that is incurred to buy material assets, which lose value over time and do not generate income. These loans usually have a high interest rate. Examples of these are credit card loans, which have a detrimental effect on the economy due to the high interest rate. This rate forces the consumer to pay more and remain with less money for spending. Other types of bad loans are the cash advance loans, whose rates are very high with short repayment periods.

To avoid consumer loans negatively affecting the economy, an individual can choose to consolidate their debts. Debt consolidation reduces the debt load by taking a lower interest loan to pay for the higher interest loans. This can improve the economy, as it will leave the consumer with more money to spend. However, if an individual is completely unable to repay the loans, debt settlement can be initiated whereby the consumer will pay one lump sum, rather than monthly repayments.

Other ways to ultimately reduce and become expunged from debt include creating a budget where the monthly spending is recorded. This record should include every utility bill, phone bill, grocery bills, electric bill and any amount that is spent. These expenses should be added up and reduced from the amount of income that is earned. An effort should then be made to reduce the amounts spent on items that are not necessary.

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