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How Families are Drowning in Debts just to keep the Middle-Class Facade

by Felix Omondi
How Families are Drowning in Debts just to keep the Middle-Class Facade

The world is so fixated on wealth and prosperity that an individual’s worth is almost always defined based on their economic social class. There is also a widespread perception of what a particular economic social class should look like. For the middle class that often includes:

Having enough income to give your family a comfortable life

Owning a safe car for the family commute purposes

Having enough savings to retire at the generally accepted age

Being able to educate your children up to college level

The problem lies in the fact that there is a fast widening gap between incomes and expenses. It is an economic reality that affects most people. A good number of people within the “middle-class” bracket fight hard to maintain that status. 

To maintain that status, the so-called middle-class family find themselves surviving from one credit facility to the next. So that they can be liquid enough to afford the lifestyle that is the middle class. Many economic survey reports show the middle-class lifestyle is now a burden, not a blessing.

You keep borrowing to maintain the facade since your real income cannot support such the lifestyle you want. In America, consumer debt currently stands at $4 trillion, excluding mortgage.

In a typical American middle-class household, the breadwinners of the family are grappling with student loans, which in 2018 stood at $1.4 trillion across the nation — coming second only to mortgage loans. An option to consider both for parents and students are Parent PLUS loans, as this type of loan can be transferred directly to the student if their parents don’t want to be responsible for paying all of the college expenses. Other than mortgage and student loans, there are also other loans competiting for the family income, including an auto loan.

Credit Cards make a Bad Situation Worse

As if most middle-income families were not already living beyond their means, you find credit card companies giving people the power to purchase consumables. Never mind they had no money to buy those good, to begin with. Add credit cards to the aforementioned loans; the middle-class families are literally swimming in debts.

Domonic Purviance, a senior financial specialist at the Federal Reserve Bank of Atlanta, says the middle-class families are increasingly finding it hard to buy a new home. Even those families with an average income of $100,000; it’s near impossible to purchase a new home.

The average price for an existing home was between $278,000 to $323,000. Domonic reckons that soon, owning a home in certain markets will become a luxury. His analysis is what one would call a ‘best-case scenario’ as it did not take into account other debts an individual might have. It also assumed a 20% down payment was to be made on the property.

According to a report by Attom Data for the Q3 of 2018, the median down payment in America is 7.6%. That translates to more extended mortgage payment period, not to mention the huge insurance premiums that accompany mortgage plan with such low down payments.

A breakdown of the research reveals that for a couple living in Connecticut with a combined income of $130,000. They still cannot afford the middle-class lifestyle when you put into accounts a mortgage load of $270,000, student loan debt of $51,000, auto loans of $18,000, and credit card loan $50,000.

The couple’s income will not get them out of the debt trap anytime soon. They must ensure their expenses are on the straight and narrow. That even means not participating in social events that might disrupt their budget.

The fact that auto loans have also been on the rise only serves to make a bad situation worse. According to Kelley Blue Book, in June 2019, the average price of a brand new car was $37,285. No small amount for most people by any stretch of the imagination.

However, despite the increasing price. Car sales have equally been increasing from 2015 to 2018, with the average annual sales hitting 17 million. Most of these car purchases were financed, with owners going for both secured and unsecured auto loans. There are also some that go for leasing options as well.

Report by Experian reveals that in Q4 of 2018, auto loans on average stood at $530 for new cars and $380 for used cars. Experian estimates that 85% of cars sold in the Q1 of 2019 were financed, with a good number being leased. Up from 76% of Q1 of 2018.

Generally, leasing a car comes with lower payments of the loans, compared to purchasing on loan. In Q1 of 2019, leases made up 34% of all new car financing. The majority of the car loans run for six to seven years, with a short grace period before the driver is required to start making payments.

The rise of Personal Loans

When you do the math, personal loans have a lower interest than credit cards. That is probably why the number of personal loans increased to $130 billion at the end of 2019. A sharp rise, especially when you consider than in 2011 it stood at $46 billion.

Much of the increase in the availability of personal loans can be attributed to the easy access to the unsecured nation 21 loans being offered by tech-savvy lenders. It is interesting to note that conventional banks withdrew support for unsecured loans, but double-backed on that policy after seeing reports showing huge returns.

Borrowing for the Wrong Reasons

Individuals who are falling behind on their student loans repayments are locked out of the financial system too early in life. However, these types of loans, including mortgage and auto loans, are deemed necessary. As they could lead to a better life if things work out according to plan.

Although you also find another section of people who take out loans to get the cash need for even the basic expenses. At the same time, it would be wrong to put blanket blame on all consumers for not affording their lifestyle.

The real estate market, medical care services, cars, and colleges have been raising their prices steadily. Without putting into account that the general consumer market income has not been increasing at the same rate. If anything, consumer pay has either stagnated, reduced, or increased at a much lower rate.

It should be remembered that on the low borrowing costs in America. The Federal Reserve has played a role in making it easier for individuals to get secured loans. The government itself also gains from consumer debt and the growing credit industry in the country.

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