Benefits of Low Personal Debt

Readers Question. what is the benefit to a country having low personal debt??…apart from fear that people wud default what else?

A low level of personal debt has various advantages.

Typically saving rates will be higher.
This enables more investment in the economy. If banks are lending to consumers for personal debt, it means that, ceteris paribus, they have less funds to lend to firms for investing in productive capacity. It is argued that investment is more important for the future productive capacity of the economy than consumer spending.

However, it is a question of balance, arguably some countries have been focusing on saving too much. But, in the UK, personal debt was so high it was a reflection of an unbalanced economy.

Economy Less sensitive to interest rates rises. If consumer debt is very high, it means consumers will be very sensitive to any rise in interest rates. If it is necessary for rates to increase then it could lead to debt default. This would be more of an issue if a country was in the EURO with a common monetary policy.
It makes Monetary / Fiscal Policy more effective. When the UK entered recession, personal debt was so high, people instinctively looked to save. It was difficult for Central Banks to boost spending despite rate cuts and tax cuts. However, in countries with lower levels of personal debt, there is more room for manoeuvre

Like many things it is a question of balance. It also depends on the type of personal debt. Mortgage debt is better than credit card debt because it is secured against the value of an asset. Though falling house prices can cause negative equity for those with large mortgages

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