Anyone who has visited a store or tried to buy necessary goods or services lately has noticed a dramatic increase in prices. Even outside of the United States, the cost of everyday goods have risen dramatically in the past few years. In 2023, the International Rescue Committee marked the average global inflation rate at 6.8%.
This cost of living crisis has manifested itself in many different aspects of human life. One of the major effects of this crisis is its relationship to borrowing, loans and in particular, loan default on things like student loans, car title loans and credit cards. To fully understand this issue, it is first important to understand the cost of living, and its many different facets.
Cost of living can be defined as the amount of money needed to cover the necessary aspects of living. Simply stated, it costs more money to live in certain areas than in others. In the United States, some states with the highest cost of living include Hawaii, New York and California, while some states with the lowest cost of living include Mississippi, Kansas and Alabama. When there is a cost of living crisis, and the price of mandatory everyday costs rise dramatically, this can have far reaching effects.
What Happens When There is a Cost of Living Crisis?
A cost of living crisis can be stressful for both individuals and institutions alike. Consumers, particularly low-income consumers, may find themselves unable to accommodate these large shifts in the economy. In addition, the following can be expected during a cost of living crisis:
- Reduced Disposable Income
- Financial Strain
- Reduced Consumer Spending
- Increased Interest Rates
When consumers are required to tighten the purse strings, they have less disposable income for unnecessary or “want” items. Typically, shopping, dining out and entertainment budgets are the first to get slashed in consumer households. This is no fun for anyone, especially local business and small business owners who rely on the community for their income and do not have a large corporation to fall back on.
The financial strain caused by a cost of living crisis can be felt by all parties. Individuals, families and local businesses all feel an increased stress when there is less disposable income. According to the National Institute of Health, more than 75% of working adults felt or experienced stress due to inflation and the rising cost of living.
In addition, not only does a cost of living crisis reduce spending which in turn affects business and consumers, but long term this can drastically pump the brakes on economic growth. Once the economy is stuck in a pitfall such as this for too long, it can be extremely difficult to get out, and take time.
All About Loan Default
Anyone who has taken part in the loan process knows the one word that you don’t want to hear: default. Loan default occurs when you have stopped making payments on a loan. One single missed or late payment will not put you in default. While it varies from lender to lender, usually a loan is considered in default if the borrower has not made any type of payment toward the debt in 90 days. Typically, lenders are responsive to proactive communication and will reach out to their lenders multiple times before loans go into default.
Particularly if you have taken out a loan that required some type of collateral, or object of value, when your loan defaults your lender will have the legal right to seize your collateral. While there are many issues that can factor into loan default, usually a borrower defaults on a loan when they do not communicate with the lender and they are unable to make the payments, usually due to an unforeseen life circumstance. A cost of living crisis oftentimes counts as one of these life circumstances.
Exploring the Relationship Between Cost of Living and Loan Default
The relationship between cost of living and loan default is extremely interconnected. Neither borrower nor lender want loan default to occur. However, the results of a cost of living crisis are oftentimes the very same causes that lead to loan default. Some of these circumstances include:
- Budget strain
- Employment and income factors
- Wage stagnation
- High borrowing costs and rates
During a cost of living crisis, households may also find themselves in a budget crisis. Households need to continue to purchase basic goods to survive and live their day to day lives. Should these costs rise, households may find themselves in a situation where they are unable to make ends meet and they skip a loan payment or two.
During a cost of living crisis, many local and small businesses suffer. If an individual’s employment is tied to any of these businesses, then a cost of living crisis could also impact their income. When consumers experience a decrease in income in tandem with an increase in consumer prices, the outcome can result in loan default among other things.
Wage stagnation, or, when the wages of workers does not rise for an extended period of time despite the rise of prices around them can lead to loan default, particularly during a cost of living crisis. According to the Economic Policy Institute, middle class worker’s hourly wage is up only 6% since 1979, whereas prices of goods and services have soared.
How to Avoid Loan Default in a Cost of Living Crisis
While a cost of living crisis is out of one’s control, there are actionable steps that you can take to help guard yourself against loan default.
First off, proactive budgeting is key. Even if you find yourself in a place where you do not have a lot of disposable income, prioritizing saving can help guard you against falling victim to any unexpected expenses. Furthermore, having an emergency savings fund can also help you to avoid taking out additional debt and loans during a cost of living crisis.
Additionally, the importance of proactive communication cannot be understated. The majority of lenders want to work with their borrowers, and everyone involved in the equation wants to avoid loan default. By communicating and documenting your communication with lenders at the first sight of financial strain and trouble, you may be able to work with a lender to negotiate your monthly payment or to even potentially put your loan in deferment.
It is easy to feel at the mercy of the economy during stressful financial times. However, you as a borrower and consumer hold much power. Through research, education and careful financial planning you have the ability to guard yourself against financial stress and loan default.
