People have changed and embraced the idea of having consumer debt opposed to past generations, where having such a loan was taken as a misfortune. In some countries, women were not allowed to have a lone until the late 1970s. The lending institutions in past generations were only offering long-term loans such as mortgages and loans to purchase assets such as vehicles. If people were interested in buying perishable products no matter the price, they had to save or work harder to afford the goods or services they need (Livshits, p.596).
Role of interest rate on consumer debt
The higher the interest rate, the higher the amount of money to be pain during compensation of the consumer debt. Therefore, people opt to pay the loan within a short duration so that to attract lower rates during compensation. Also, people are discouraged from taking higher consumer loans since they are associated with higher interest rates (Livshits, p.598). The other issue is that organizations that offer lower rates of interest they end up having many individuals applying for the loan.
Typical interest rates
Various interest rates can be applied to mortgages and such include adjustable rate mortgage, fixed rate mortgage, FHA loans, hybrid adjustable rate mortgage and VA loans. On the other hand, credit card interest rates involve average credit card interest rate (APR), Average intro APR duration as well as average credit card penalty interest rates (Carlstrom et al., p.231).
Importance of variable interest rates compared to fixed interest rates.
Variable interest rates may increase or reduce the amount of money to be paid by the borrowers depending on the variability made by the federal government. Therefore, housing loans paid in installments will only change the amount to be paid and not the period (Carlstrom et al., p.236). Also, pension plans might rise or fall due to the variability of the interest rate.
References
Livshits, Igor. "Recent developments in consumer credit and default literature." Journal of Economic Surveys 29.4 (2015): 594-613.
Carlstrom, Charles T., Timothy S. Fuerst, and Matthias Paustian. "Inflation and output in New Keynesian models with a transient interest rate peg." Journal of Monetary Economics 76 (2015): 230-243.
