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CONSUMERS CONSIDER VARIOUS economic factors in making their borrowing decisions. Thus, to interpret the movement of consumer credit accurately, one needs to identify the economic factors that influence consumer borrowing and understand the ways those variables affect consumers' decisions. This article studies consumers' borrowing behavior by investigating both long-term trends and short-term fluctuations of consumer credit in relation to economic and institutional factors, including the Tax Reform Act of 1986, which phased out tax deductions for interest expense on consumer debt. The focus is on consumer installment credit, which includes major categories of consumer loans such as automobile and credit card loans.
The behavior of consumer credit has attracted considerable attention during the last 10 years. Many analysts argue that consumers accumulated excessive debt in the 1980s and became reluctant to use credit in the early 1990s. In fact, after growing rapidly in the mid-1980s, consumer installment credit declined in many quarters during 1991 and 1992. The decline of consumer installment credit in the early 1990s is particularly interesting because it occurred despite low interest rates. The decline during the early 1990s after a period of rapid growth may not be fully explained by changed consumption expenditures. Thus, it appears that consumers have changed the pattern of financing their purchases.
The change in consumer installment credit is the difference between the extension of new credit and the repayment of the principal of existing debt. This article examines the variables that may affect the proportion of consumption that is financed by debt and the rate at which consumers repay existing debt principal.
GROWTH OF CONSUMER INSTALLMENT CREDIT
Consumer installment credit covers most short-and intermediate-term credit extended to individuals for which repayment is scheduled in two or more installments, excluding loans secured by real estate.(1) Consumer installment credit, which totaled about $760 billion at the end of 1992, consists of three main categories: automobile credit, revolving credit and other credit.(2) Revolving credit is mainly credit card loans, and the category other credit includes loans to finance purchases of mobile homes, home appliances and furniture, and personal loans. Major lenders are commercial banks, finance companies, credit unions, savings institutions, retailers and gasoline companies.
The economic importance of consumer installment credit may be illustrated by examining it in relation...