Overspending, the rising cost of living, property and automobile purchases are the main contributors to the high level of household debt. We can make a case that a housing loan is a “good” debt, as property is a form of investment. Over time, property value appreciates, particularly those at strategic locations.
On the other hand, the same cannot be said about a car loan. A car is a liability, as the value depreciates over time. However, in many cases, a car is a necessity for a household due to poor public transportation, even more so for a family with children or elderly parents.
So let’s take housing loans and car loans out of the equation and focus on the rest of the household debt. As we dig deeper, easy access to credit cards and personal loans, as well as spending habits could well contribute to the predicament faced by many.
One can justify that a credit card is a “necessity”, as it is impractical and unsafe to be carrying lots of cash, especially when we want to purchase higher-value goods. However, why not use a debit card as an alternative mode of payment where one can only charge based on the balance in one’s savings account?
This way, no one would fall into the trap of overspending. But then there is a follow-up question to this arrangement: why is there a general preference by retail outlets or hotels to accept credit cards, instead of debit cards?
By doing this, we are exposing consumers to interest charges, thus benefiting only the credit card issuers. Perhaps this is where relevant policy should be formulated to encourage a method of payment that would minimise personal debts, thus protecting the wider consumer’s interest.
Next, let’s question the need to have such a product as a personal loan. With a personal loan having a generally lower interest rate than a credit card, it is the lesser between the two evils, presumably.
Supply and demand is clearly a key contributing factor to the popularity of personal loans, depending on consumers’ needs or wants. But if eligibility criteria are not based on real needs that would benefit consumers in the long run, such products will expose consumers to unnecessary debts.
Policy makers should play a key role in protecting consumers by formulating relevant regulations and bringing together relevant government agencies and corporate sponsors to assist those in need, for example by offering soft loans to start small businesses. To encourage participation, relevant incentives can be offered to the sponsors, such as tax breaks.
One obvious solution to this whole household debts issue points squarely to the consumer. Common sense prevails, and that is, to only spend within our means. We must spend less than what we earn, but unfortunately the reality is a lot more complicated, particularly for the average consumer, considering income levels, the cost of living, financial planning (or rather lack of) and lifestyle.
Let’s be financially savvy and spend within our means, wisely.
MBA student at Regent Business School