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Sunday, 29 May 2016 08:00

Household Debts: Where Do We Go From Here?

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household debt

Much has been said about the high level of household debts in the country. Overspending, increasing cost of living, property and automobile purchases are the main contributors to the prevailing level of household debts. We can make a case that 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 car loan as car is a liability as the value depreciates over time. However, for this discussion, let’s assume that we can justify for a car loan, by stating that a car is a basic necessity. In many cases, a car is a necessity for a household due to poor public transportation, even more so for family with kids or elderly parents.

Given the aforementioned justifications, let’s take housing loan and car loan out of the equation and focus on the rest of the constituents considered as household debts. 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 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, we can argue, why not use 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 retails outlets or hotels to accept credit card instead of debit card? 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 method of payment that would minimize personal debts thus protecting the wider consumer’s interest.  

Next, let’s question the need to have such a product as personal loan. With personal loan having generally lower interest rate than 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 loan, 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. This is where policy makers should play 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 loan to start a small business. To encourage participation, relevant incentives can be offered to the sponsors, such as tax break.

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. It is a simple math where we must spend less than what we earn unfortunately the reality is a lot more complicated particularly for the average consumers, considering income levels, cost of living, financial planning (or rather lack of), lifestyle etc.

As consumers, we can control our spending. As human, our lifestyle is influenced by our upbringing and surroundings. Human can live moderately but consumerism always encourages spending and following trends. At times, we end up spending on the things that we do not need. The worst is to spend money we do not have on the things that we do not need. In this regards, media portrayal and advertisements do not help.  Often times we end up as followers, to our own detriment.

Let’s look at the bigger picture.

In the overall scheme of things, the key players are consumers, retailers, banks and policy makers.

As consumers, banks are our friends as they help us buy things that we want, relatively fast. However, for being fast, the banking industry and the whole ecosystem encourage short term gratification and spending our future money today - money that could have been better placed for our children’s education or retirement plan.  

It is a no brainer that retailers and banks exist to make money. There’s nothing wrong with that providing that we live in a fair and healthy environment. We’d like to think that banks and modern life are inseparable. Being a major component in the overall ecosystem, banks are powerful and have the upper hands as they dominate our lives. Banks almost always make money as they only take minimum risks. With this lopsided arrangement, when a bank-customer relationship turns sour, the unfortunate happens and customer would be the victim. This is where regulations are required to mitigate risks to customers.

As we discuss the household debts every now and then, we often hear about financial literacy, and the need to create awareness and educate people to be financially savvy. Any initiative to increase financial literacy is obviously good, and the earlier we start the better. Our young people must be exposed to financial planning at a very early stage of their lives.

In the wider context, we should recognize that we live in a contradictory and unbalanced world where financial literacy and good common sense are sitting at one end and consumerism (materialism) is sitting heavily on the other end. We might feel hopeless but as consumers, let’s go back to basic to work within our circle of control (influence), as Stephen R. Covey would have it. While the world is imperfect, the choice is in our hands. Let’s be financially savvy and spend within our means, wisely.

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