Loan

Unlike businesses, consumers rarely use debt to invest and generate income. Instead, they use debt to buy consumables that do not generate income, such as cars, houses, furniture and electronics. In this case, interest is no longer a cost of doing business. It is now the cost of living beyond one's means. This cost ranges from the typical mortgage rate, to the typical credit card rate multiplied by the outstanding debt. Over the course of a consumer's entire life cycle, this can mean quite a bit of money.

Consider a typical 6% 30-year mortgage. Here, the total interest over those years is about 105 percent of the cost of the home. For those just starting repayment, interest and finance charges make up almost all of the monthly payment - home equity is largely built at the end of repayment. Becoming wealthy and financially independent in this way is very difficult, and paying interest should be more accurately thought of as paying rent, along with taking on all the expenses associated with owning a home. All debt has a contractual obligation to repay and is usually structured to last 30 years in order to minimize the individual's monthly payments, but definitely not to minimize the total number of payments, which is accomplished by increasing the maturity date of the loan as much as possible. If the maturity date is permanently extended, the interest payments will be similar to rent. If the only means of repayment is a job, this means that the job must also last at least 30 years. In this way, a decision after graduation becomes a lifelong commitment that is hard to escape, since the borrowed money is spent on increasing consumption rather than increasing production.

Most major consumption is supported by financing. This means that the money spent on primary consumption is not earned by those who spend it. This has had a huge impact on the market setting prices that can be financed, and today, anything - even fast food from a burger chain - can be financed with unsecured credit. Specifically, things are priced not based on how much people have saved, but on how much borrowers and lenders think they can pay each month in the future. This is set by interest rates (which are partly manipulated by the government) and credit ratings (which are partly manipulated by individual consumers, lenders and credit rating agencies). These in fact change the way people think about money. What you save is more important than what you can borrow.

The result is that costs in terms of hours worked are no longer adequately valued, and people work more and spend more - sometimes far more - if they are paying cash they expect to be able to pay back in the future or have debt stacked on top of debt, locked up forever. Many even spend so much that they can't pay it back, leading to a misallocation of resources that could be used more equitably by those who earn them. The systemic consequence of this waste is that prices in debt-driven societies are higher than prices in cash-driven societies because more money (credit) is chasing commodities.

This leads to bubbles and crashes because credit is either too cheap or too expensive, and the psychological lag leads to a bipolar economy of alternating optimism and pessimism. Economists, or indeed most individuals engaged in lending, have not yet been able to perfectly model future demand and supply, so an economy based on future demand and supply projections (pricing future payments in the form of interest rates) is inherently unstable. Ideally, personal finance would shift cash flows in time so that funds are available when they are most needed and repaid when they are least needed. However, this shift comes at a cost in terms of fees and interest. In particular, many people who know nothing about it will simply make the standard choice, which effectively involves a contractual obligation to work for life in exchange for a home, vehicle, furniture, electronics and other things. That said, a paycheck, or even the potential for a future paycheck, seems to be the gateway to debt drugs; thus, many people can reduce the risk of falling into debt by simply quitting their jobs.