Rounding Up Those Personal Loans

By S.C. GWYNNE

For the Fiorentino family of Freeport, N.Y., the debt party of the 1980s is over. Like many U.S. couples, Teresa and Greg Fiorentino both worked, bought a modest house and borrowed heavily on their credit cards to finance a rising standard of living. But after Teresa, 36, quit her job as an airline reservations agent to have children, the Fiorentinos found their debt payments were devouring 65% of their income. A few months ago, they decided to stop using their credit cards. Greg, 45, has joined a savings program, and the couple have vowed to reduce 90% of their debt within the next three years. "It's not because the country is going into a recession that we're changing our spending habits," says Teresa. "It's more personal than that. We've come to realize that in order to plan for the future and to do the things we want to do, our habits had to change."

While the Fiorentinos have more debt than the average U.S. family, their situation is becoming increasingly common. Most Americans have had to rely on borrowing to pursue their dreams because real wages for middle- and low-income workers fell 12.4% between 1972 and 1988, a time when real estate prices were rising relentlessly. While consumer spending grew no faster in the 1980s than it had in the previous two decades, consumers were forced to borrow with a vengeance to make up for eroding income. As a result, the total debt of the average U.S. household rose from the equivalent of 77% of annual income in 1980 to 94% this year, a postwar high.

"To sustain or improve their life-styles, they had to borrow, and the environment favored borrowing," says Robert Dugger, chief economist of the American Bankers Association. That environment was fostered by aggressive financial institutions that hyped both credit cards and personal loans. As the debt burden has increased, so have personal bankruptcies, which have more than doubled since 1985, to more than 700,000 in the 12 months ending in June. Credit Counseling Centers of Novi, Mich., which advises troubled debtors, describes its typical client as a 44-year-old male with a monthly income of $2,208 who owes 13.6 creditors an average of $2,024 each.

Yet the volume of consumer debt may be less burdensome than it appears, mostly because of the way it is structured. Consumers now stretch out their $ debt over more payments. Many car loans allow 60 months to pay, instead of the traditional 36 to 48 months. Credit-card holders can pay as little as 1.65% of their outstanding balance each month, while home-equity loans are drawn out to as much as 15 years. As a result, the portion of household income devoted to debt payments is roughly the same today, at 13.6%, as it was in 1970, at 13.5%. At the same time, many householders still have a cushion of equity in their homes that was built up in the 1980s, despite the current decline in real estate values in some regions of the U.S. Those factors have kept loan delinquencies and mortgage foreclosures from increasing much in the past two years.

Even so, the sheer size of the consumer debt burden remains a threat to the health of the economy. "The whole idea of stretching out debt maturities to provide a soft landing is a snare and a delusion," contends economist A. Gary Shilling. "When you go into default, the total size of the debt is all that matters."

The fastest route to default is unemployment, which is on the rise. The U.S. jobless rate has increased from 5.2% in June to 5.7% in October; in those five months the country has lost 336,000 jobs. One of the causes has been corporate debt, which has forced many companies to take drastic cost-cutting steps. While it may be beneficial for U.S. consumers to prepare for hard times by saving more and spending prudently, an overreaction would be dangerous, since consumer spending accounts for roughly two-thirds of the U.S. gross national product.

So far, people have kept their heads. Statistical measures of U.S. consumer credit show that it is still growing, but economists expect such borrowing to expand only 3.5% this year, in contrast to increases of about 8% in each of the past two years. As for the Fiorentinos, when their 1980 Volkswagen broke down, they replaced it with a modest 1986 Isuzu Trooper. Autoworker Bruce Boyd, 30, of Leonard, Mich., says his family has been trying to avoid using credit cards for the past several months. "I'm trying to tighten up just because of the world situation," says Boyd. "I am more conscious of it. I'd just as soon pay cash now."

Other consumers are taking advantage of home-equity loans to consolidate their other debt. The equity loans are attractive for their long maturities and because the interest is tax deductible. Home-equity loans will grow about 27% this year, much faster than other consumer borrowing. "It definitely provides a cushion that wasn't there 10 years ago," says Barry Bosworth, an economist at the Brookings Institution in Washington.

Increased consumer caution will have its victims. Lenders will have fewer eager borrowers. Automakers and retailers will suffer from slower sales as customers make do with what they have. Last week major retailers reported dismal revenues for the month of October. One hard-hit firm, J.C. Penney, said its sales fell 6.3% from the same month in 1989. Shoppers are particularly avoiding such discretionary items as clothing and furniture. At a time like this, consumers are apparently finding that the thrill of shopping is nothing compared with the satisfaction of paying off some debt on an overburdened credit card.

With reporting by Joe Szczesny/Detroit and Lisa Towle/New York