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Personal loans trigger a spike in bankruptcies not seen since the Great Recession

Pop Quiz: what’s the fastest growing type of consumer debt in the U.S.?

If you answered, “credit cards,” I couldn’t fault you, as they climbed to $930 billion, the highest level ever and an $46 billion increase since just the previous quarter.

Perhaps you got tricky and guessed that it’s student loans, which have jumped to a record $1.6 trillion, with the average college graduate with loans now entering the working world with more than $31,000 in educational loans.

And if you’ve really been paying attention, you may say that auto loans have become the newest threat to our debt load, as they’ve risen to $1.1 trillion, nearing all-time highs.

But the answer is ‘D,” none of the above.

It’s personal loans that constitute the fastest growing segment of the consumer credit market, according to FIntechs. 

That’s right, banks and lenders are offering personal loans at a record rate, with little scrutiny and no collateral attached like a house, a car, or even the promise of skills and higher pay when they graduate college.

And all of that questionable lending has led to a backlash of consumers who can’t pay back those personal loans – a clear sign that trouble is brewing in our economy.

In 2019, personal bankruptcy filings increased for the first time since 2010 – the midst of the dark days of the last recession.

Sure, we can consider the glass as half full when we look at economic indicators like 50-year unemployment, but respected financial analyst Raghuram Rajan, a Chicago professor and former Governor of the Reserve Bank of India who predicted the last crash, points to this increase in BKs as a symptom of “widening income inequalities [which] were a driver of the unstainable leveraging of low-income households before the crash.” 

Furthermore, “Since then, income inequalities have increased, with most the of the income and wealth gains accruing to hire income-households.”

Maybe it’s the difference between people who NEED these personal loans (and other debt) just to pay bills and stay afloat, versus the higher-income households who leverage debt and loans as a calculated business strategy to further their gains?

In fact, the lower 20% of household income brackets in the US hold 234% debt compared to their income, followed by 127% of debt-to-income for the next 20% of American earners, 131% and 130% for the third and fourth percent, respectively.

That only falls below 100% DTI to 34% of Debt-to-Income for the richest 20% of American households. 

What does it all mean? We’re racking up FAR TOO MUCH debt – including personal loans, and that bill is going to come due once the economy shifts and the next recession comes! 

Please reach out to me if you’d like to discuss your finances, investments, or how to properly manage your household debt!