Why do people take on so much debt?

[theMoreDisneytheBetter]

The thread about deciding which loan to pay off (DVC or not) first had me thinking about why people go into debt to begin with.

TO BE VERY CLEAR THIS IS IN NO WAY DIRECTED TOWARDS THE OP OF THAT POST.

One of the things I hear a lot in finance is not to bet against the stupidity of the US consumer. I can’t remember the exact numbers but consumer spending makes up a huge portion of our economy, and if the consumer would limits its purchases to only what it can afford the economy would collapse.

For the life of me, I just cannot fathom willingly taking on a lot of debt. So many people I talk to are comfortable with their student loans (the government will pay them off so they don’t have to), will take on huge car payments or lease their cars to be able to have the newest/fanciest, take out mortgages with very little down payment, run credit card debt, and finance luxuries like the latest electronic gadgets or vacations. And then thinking about financing a DVC purchase at 10+% on top of that! DVC locks the buyer into expensive vacations year in and year out. It is not a product for someone who is struggling to make ends meet.

Call me old fashioned but if I can’t afford something I don’t buy it. My parents saved for my undergrad, and then I paid off my grad school loans in about 9 months. We put down 20% for our first house, 50% for our second, and paid for our current house in cash. Our cars were purchased used for cash and will be driven for 10+ years. We don’t eat out very often. We will pay for our kids’ undergrad education.

I recognize that we are extremely fortunate, but some of that fortune comes from being frugal for a long time.
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Edited to add (because it came up below): I am talking about WANTS here, not NEEDS. No judgment about medical debt, etc. And student loans are not inherently bad. Excessive student loans are.

As an example of what I am talking about: my brother has decided to do a major remodel on his house. He has virtually nothing saved for retirement. He has no real emergency fund. His kids are on their own for college. He is going to borrow as much against the value of his home as he can AND put in their entire life savings to fund what could easily end up running $250,000 or more. Yet even this may not be enough, and he doesn’t have a plan beyond “it will work out” on how to pay for it! He hasn’t even bothered to calculate how much it will cost to borrow against a home equity line of credit and how that will impact his monthly budget. This is 100% want a 0% need.

 

[WDWEPCOT]

Not everyone takes on debt being “reckless” they could’ve incurred expensive medical bills they could be single parents especially women making low wages and having kids to take care of
Not everyone gets support from their parents or get a good start off in life
Not everyone has money aside or even if they do experiences one disaster after another and those funds will soon be depleted but you can’t help the disasters
They may have experienced a loss and then a disaster
Things in life happen the best laid plans can go astray once you end up in that slope it’s really hard to get out of it
You may just get another job so you can pay off that debt again I’m going to say it may not always be that easy if you’re a single mother with children you may not have that option to take on another job if you don’t have a support system or you don’t have daycare available or you can’t afford the daycare there’s a lot of factors that go into some people having incur such debt
I am not saying this is the case for everybody but it’s not fair to put everybody in that bucket that they’re just recklessly out there spending money and incurring debt
They may have had a spouse die / they may have gotten a divorce there’s a lot of factors that go into these things
Not everyone is so fortunate and lucky to be able to always pay cash for cars and houses for repairs and for life emergencies no matter how hard they keep trying to plan for it

 

[Ursula J]

OP, I'm with you. I took 20 years to pay my student loans (for a PhD) but I paid every cent. Because that's what you do. I won't go on vacation if i don't have the money ahead of time
Pay off cards every month so I make money off them! I had no help and a modest upbringing. I pay extra on our 3.5% mortgage (our only debt), no car loans. But debt makes me anxious. I can't live like that. I think people go into denial, and they want what they think they should have instead of what they can afford. I want Dvc someday but not until I can buy it in full. Interest is a donation to people who are already rich.
Btw,I had to learn all this on my own, and I'm not judging people who haven't had that opportunity.
Edit to add: I'm addressing optional debt, not the stuff life throws at us no matter how hard we plan, like medical emergencies or truly unexpected home repairs, etc.

 

[FreeTime]

Thanks for posting. I had considered posting something similar after the other thread.

When we were starting out our married lives we had quite a bit of debt. It was quite suffocating! So glad to be out of it. I do consider ourselves to be fortunate but at the same time we are frugal in our day to day lives and save, save, save.

We gradually added onto DVC. Our first home was $30,000 (this was in the 00s and these houses are $60,000 now - well under the affordable housing stat in our area), we did as you did, traded up with a goal to pay off early. We paid off our trade up home last year in our 40s. We aren’t moving as we don’t want the housing debt. I do think our desire to not have a mortgage is contributing to younger people not being able to find housing that they can afford. But, to find a home as nice as ours and smaller would cost us $800k. Our current one would sell for $400k. Only reason to move would be a want.

We pay cash for a new car every 7-10 years and drive it until it’s wheels fall off.

Concerning college, I slowly got my undergrad and grad by working for employers that would pay for it. Our children have graduated college debt free through our help and by working during college. It is possible to go to college debt free by taking a bit longer.

I weigh the budget carefully each time I have a want instead of going into debt. I want a $x,xxx purse but I want to go on a special trip more. If a medical bill were to come up that I couldn’t cover, I would pay that and not go on vacation.

I think a lot of the debt continues to be about the wants not the needs.

 

[Ursula J]

Not everyone takes on debt being “reckless” they could’ve incurred expensive medical bills they could be single parents especially women making low wages and having kids to take care of
Not everyone gets support from their parents or get a good start off in life
Not everyone has money aside or even if they do experiences one disaster after another and those funds will soon be depleted but you can’t help the disasters
They may have experienced a loss and then a disaster
Things in life happen the best laid plans can go astray once you end up in that slope it’s really hard to get out of it
You may just get another job so you can pay off that debt again I’m going to say it may not always be that easy if you’re a single mother with children you may not have that option to take on another job if you don’t have a support system or you don’t have daycare available or you can’t afford the daycare there’s a lot of factors that go into some people having incur such debt
I am not saying this is the case for everybody but it’s not fair to put everybody in that bucket that they’re just recklessly out there spending money and incurring debt
They may have had a spouse die / they may have gotten a divorce there’s a lot of factors that go into these things
Not everyone is so fortunate and lucky to be able to always pay cash for cars and houses for repairs and for life emergencies no matter how hard they keep trying to plan for it

Oh I agree 1000% on emergencies and life changes. What I said about debt below is related to purely optional things, like buying DVC or getting a new car when you don't need one!

 

[Allison]

You are acting like everyone who has debt is being frivolous and going into debt for luxuries. If you need to finance a car to meet your life needs or get to your work so you can make a living then that is what you do. Having 20% or 50% down is going to be a real barrier to a young person who wants to start building equity in a home.

You are only looking at this through your circumstances and failing to see others aren't in a position to do it the way you did.

 

[thanxfornoticin]

I weigh the budget carefully each time I have a want instead of going into debt.

I think a lot of the debt continues to be about the wants not the needs.

I so agree with these 2 points. When I have conversations with friends or family struggling financially, I'm amazed at how little effort is put into understanding their budget! And budget doesn't need to be down to the penny. But a budget should be at least knowing how much money is coming in, how much is going out, and what's left over (or how much am I short?). And credit is just so darn easy to come by these days.......

 

[thanxfornoticin]

You are acting like everyone who has debt is being frivolous and going into debt for luxuries. If you need to finance a car to meet your life needs or get to your work so you can make a living then that is what you do. Having 20% or 50% down is going to be a real barrier to a young person who wants to start building equity in a home.

You are only looking at this through your circumstances and failing to see others aren't in a position to do it the way you did.

In fairness, the original post that was referenced above was someone asking about opinions on their debt, which included school loans, car loan, mortgage (if I remember correctly), and DVC contracts financed. DVC timeshares certainly would be considered a luxury, especially with all the other debt on the table.

 

[auralia]

For college, from our parents, my husband and I received 0 help of any kind. He joined the military and we were married at 19 because I just couldn’t afford school or to live on my own at that age. We didn’t have kids for several years and I worked odd jobs because at 19 without a degree that’s what I could get. I just couldn’t bring myself to borrow as much as I would have needed for school and he was stationed in a very expensive city. There were no programs to help military spouses go to college at that time. Then stop loss and he couldn’t get out of the service…. So we decided to have kids then he was 10 years in and we just stuck it out the other 10. I got my associate in nursing when my youngest of 2 was 7 and my bachelors one year later and my masters 3 years after that. We saved from the day he entered the military 200$ a month until 14 years in and that’s what paid for my school. It took years and years of savings to get to where I could afford to go without taking on a mountain of debt. We did not live extravagantly we had one cheep car, didn’t go on vacations, and ate cheep processed food to get by and avoid debt. Life really was not fun, just an exercise of making it through.

If you are not given a hand up from family to start life you are set back so far from those that are. Putting my education on hold for 14 years because we couldn’t afford it set me back for retirement savings etc. I’m playing catch up with my retirement now and always will be. Hubby has a decent retirement but if he passes away I wont have enough unless I work my but off the next 20 years. Also working to pay for the kids college because we want them to not have to live how we did and have the stresses we had. We saved for them since the day they were born and still don’t have enough but much much more than we were ever given and 4 years of GI bill to spread between them they will not have to worry much about college expenses.

I know it’s a long rant but you had a great start in life. My start honestly wasn’t too bad I had parents that cared just didn’t have extra $$$, hubby’s parents just didn’t care took him to the recruiters office on his 18th birthday to sign enlistment papers. Some people come out of 18 years in the foster system others have drug addicted or alcoholic parents or abusive spouses and loans are the only way they can make it through. One bad injury, illness, or job loss in this economy can mean homelessness. Indentured servitude is still very real. Working for low pay so large corporations can make billions and you have just enough to keep eating is no different then fudal lords and part of the system is to ensure people are always in debt so they can never get out of those low paying jobs to better themselves so the 1% can continue to become richer.

End rant but stupid loans for the fancy thing to keep up with the neighbors… I definitely don’t get those, but ending up under a mountain of debt due to limited resources and high aspirations of education and life… for a lot of people that is the only option to try to get out of poverty.

 

[_19disnA]

Everyone's financial situation is different, so I don't think you can make generalizations about what sort of debt others might incur.

 

[Ursula J]

I think maybe we're talking about 3 kinds of debt? 1. Basic needs (housing, transportation, health care) that can be incredibly expensive and don't always allow for planning or saving, especially for the young or underemployed.
2. Student loans. Education remains the single best path to higher income, statistically, and sometimes a fixed- rate federal loan makes sense if you plan to pay it. (Never count on taxpayers bailing you out)
3. "Fun" debt, like DVC, other vacations, the purse you want but don't need, etc.( My friend is financing coolsculpting!! Ahh!!)

My issue-- and I think the OP's from what I can tell?-- is #3.

 

[gottalovepluto]

What is there to wonder about? People take on debt either because they have to or because they want to. Those who want to have decided the debt is worth the better lifestyle the debt allows them to afford. They either pay it off before it drowns them or they drown- and the gamble is worth it to them.

Although if this was just about the topic at hand we wouldn’t have all just read OP’s humblebrag about their personal finances…

 

[Allison]

Everyone's financial situation is different, so I don't think you make generalizations about what sort of debt others might incur.

Exactly. My parents couldn't save for college. We were poor so I had student loans. Student loans that I paid just like my kids are.

 

[Allison]

I think maybe we're talking about 3 kinds of debt? 1. Basic needs (housing, transportation, health care) that can be incredibly expensive and don't always allow for planning or saving, especially for the young or underemployed.
2. Student loans. Education remains the single best path to higher income, statistically, and sometimes a fixed- rate federal loan makes sense if you plan to pay it. (Never count on taxpayers bailing you out)
3. "Fun" debt, like DVC, other vacations, the purse you want but don't need, etc.( My friend is financing coolsculpting!! Ahh!!)

My issue-- and I think the OP's from what I can tell?-- is #3.

Except they specifically talked about student loans, housing and transportation and how they paid for those things.

 

[Ursula J]

Except they specifically talked about student loans, housing and transportation and how they paid for those things.

I'll just speak for myself, then, and say that what I was personally talking about was optional debt.

 

[Allison]

I'll just speak for myself, then, and say that what I was personally talking about was optional debt.

Thank you for clarifying.

 

[theMoreDisneytheBetter]

OP here. Yes, I was specifically referring to #3 - “fun debt” - and definitely not something like medical debt. But to be fair, based on consumer spending patterns I think that there are plenty of people who do not understand the difference between a need and a want.

Eg. I needed a place to live, but I wanted to live in something larger than the small 1BD in NYC once the kids came along. Could we have taken out big loans to buy a $2mn+ apartment? Sure. But I couldn’t fathom making that kind of financial decision, so we stayed until DS was about to go to school and then moved out of the city.

I’d love to send my kids to (a better) private school like some of their friends go to, but with 2 kids paying $80-100k for school AND saving for college just isn’t going to happen, so we have chosen to save for college instead. We are also encouraging our kids to think about public college instead of private unless they get into a tier 1 school or otherwise have a need that public school won’t satisfy. Debt for Harvard is probably ok. Debt for a 4th tier private party school…that’s a want, not a need.

 

[DCLMP]

It's pretty simple low interest rates for a decades have made it very easy to take on debt.

 

[mjkacmom]

OP here. Yes, I was specifically referring to #3 - “fun debt” - and definitely not something like medical debt. But to be fair, based on consumer spending patterns I think that there are plenty of people who do not understand the difference between a need and a want.

Eg. I needed a place to live, but I wanted to live in something larger than the small 1BD in NYC once the kids came along. Could we have taken out big loans to buy a $2mn+ apartment? Sure. But I couldn’t fathom making that kind of financial decision, so we stayed until DS was about to go to school and then moved out of the city.

I’d love to send my kids to (a better) private school like some of their friends go to, but with 2 kids paying $80-100k for school AND saving for college just isn’t going to happen, so we have chosen to save for college instead. We are also encouraging our kids to think about public college instead of private unless they get into a tier 1 school or otherwise have a need that public school won’t satisfy. Debt for Harvard is probably ok. Debt for a 4th tier private party school…that’s a want, not a need.

All of my kids attended public’s for undergrad, the ones who did residential at in state public’s still paid over $120,000, the ones who went to oos public’s even more (even after getting a top level of merit). So more than a half million (one commutes so that saves money. My daughter’s doctorate program is $150,000 after merit, not including housing or food. So looking at $700,000+ all in.

 

[gottalovepluto]

It's pretty simple low interest rates for a decades have made it very easy to take on debt.

And don’t forget the debt craze that fueled our last holiday season: Buy Now Pay Later

There was an interesting study by the Fed recently on use of this product. While it certainly surged over the holidays it is also being used to buy necessities like groceries as a sort gap loan by those in the worst financial situations. Link