Reader Question: What is Consumer Debt?

Lately, we’ve heard quite a bit about consumer debt. And how it’s actually declining. So, with all this talk about consumer debt, it’s not surprising that I’ve received this questions from a reader:

What is consumer debt? What other kind of debt is there?

The answer to this question is fairly straightforward: Consumer debt is basically the debt used to buy things. Credit cards, auto loans and personal loans are examples of consumer debt. You these types of loans to purchase items that do not necessarily constitute an investment with the chance of return. The goods purchased are consumed — and they don’t offer a tangible return on the money you put into it. Going into debt for consumer items is generally considered a Bad Idea by most financial experts.

Other kinds of debt

There are other types of debt. Mortgage debt is not considered consumer debt, nor are loans used to start businesses. These debts are for items that have the potential to give back. You aren’t merely consuming the products — you are putting your borrowed money into something that has the chance to appreciate in value.

Student loans are kind of a mixed bag type of debt. Some classify them as consumer loans, since an education does not always yield returns that are in line with what has been spent. Others, however, consider education a valuable investment, with student loans providing the opportunity to boost earning power down the road.

It is important to note, however, that borrowing overmuch is a Bad Idea, even if you are not using consumer debt. A mortgage that you cannot afford or crushing student loans are not a good idea. The priority is to borrow as little as possible.

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