Consumers are taking on more debt at a faster pace than they have in nearly 15 years as the economy heats up. But academics and experts fear that lower-income and minority consumers face disproportionate risks of taking on that debt.

Recently released data from the Federal Reserve Bank of New York found that consumer debt ballooned by $333 billion in the fourth quarter of 2021, with car loans and home originations propelling much of the growth.

Rising car prices for new and used vehicles forced borrowers to take larger loans. And they became necessary purchases as consumers prepare to return to working in offices. Homebuyers raced to close deals before interest rate hikes further push up mortgage rates. Consumers also appeared to be encouraged by the falling, though still elevated, Covid-19 rates, and spent more on travel and leisure options such as bars, restaurants, hotels, airfare and motor fuel.

Uneven debt

For consumers living paycheck to paycheck already, rising interest rates increase their costs of carrying a balance from month to month, straining already stressed household budgets. With stimulus and government relief spent, consumers have again turned to racking up credit card balances to pay for essential goods, whose rising costs show no signs of abating.

Banks in turn have relaxed their credit requirements, curtailed at the outset of the pandemic-induced recession, to capture the burgeoning demand, allowing borrowing to rise further.

“These trends — rising credit card debt, higher inflation and higher interest rates — will affect lower-income households the most,” Ted Rossman, a senior industry analyst for Bankrate, said. “They’re more vulnerable to begin with because more of their paychecks go towards essentials such as housing, food and transportation, and all of those costs are rising rapidly. They don’t have as much flexibility to cut back on extras.”

Racial disparities

Minority and low-income households face the greatest dangers of the consumer debt surge, academics say. Because they already start from an extremely disadvantaged position of low or no assets, when they do take on these burdens, it sends their debt-to-asset ratio soaring, relative to other borrowers, academics say.

The consumer debt to consumer durable ratio, a measure of what people owe compared to the physical assets they have, breaks sharply along racial lines.

For Black people, it’s over 125 percent, Latinos 70 percent, other or multiple races about 100 percent, and for whites it’s slightly over 50 percent, according to data compiled by Christian Weller, a professor of public policy and public affairs at the University of Massachusetts, Boston, and a senior fellow at the Center for American Progress, a progressive think tank.

“It’s risky debt,” he said. “It’s an income risk for people who borrowed the money.”

Borrowers take on loans to buy a car to be able to go to work or go to college, essentially an investment or bet that the car or the degree will pay off greater than its cost. But Weller explained that minority and low-income borrowers are at greater danger of being laid off or not completing college for various reasons.

Black students had the lowest completion rate among students who started in four-year public institutions, according to research by the National Student Clearinghouse Research Center, just 45.9 percent. Among Hispanic students, the completion rate was 55 percent, white students 67.2 percent, and Asian students 71.7 percent.

During the Covid pandemic, white unemployment has fallen faster than Black unemployment and a higher percentage of Black workers report being permanently laid off, according to Bureau of Labor Statistics data analyzed by the RAND Corp. It’s not just the pandemic, either. Historically, studies show Black people are the last to be hired during growth times and the first to be fired in recessions.

“The group that persistently owes a lot more than they own is African Americans,” Weller said, citing his analysis of Federal Reserve data.

For example, when buying a new car, “they have to go deeper in debt to buy the car and they may go with a lower quality one, so the loan-to-value ratio is worse to begin with,” he said.

Broader impact

Advocacy groups say the ballooning consumer debt only adds to the greater burdens shouldered by minority, low-income and other historically disadvantaged populations facing systemic lack of access to affordable credit.

“The economic impacts of this crisis highlight how communities of color are disproportionately harmed by structural inequities that exacerbate the impact of lower incomes, stagnant wages, lack of savings, lower credit scores, higher unemployment rates and a multitude of other issues,” said Ellen Harnick, executive vice president at the Center for Responsible Lending, a nonprofit consumer advocacy group.

“As inflation and consumer debt increase rapidly, these Americans likely will find it harder to pay for housing, food, transportation and other necessities, or to acquire funding to sustain their small businesses. The impending end of Covid-related government support programs is likely to lead struggling families back into the debt trap of predatory lenders who offer easy money at outrageous interest terms that often result in more financial stresses and abusive debt collection efforts.”