At the eleventh hour, just three days before the US was set to default on a national debt, the House of Representatives and the Senate agreed to raise the debt ceiling.
The bill – The Fiscal Responsibility Act – is expected to be signed into law by President Biden this afternoon and will include a ceiling increase and a government spending cap for the next two years.
This agreement between both parties eliminates the risk of default, as well as the possibility of a monumental increase in financing costs and interest rates. Here you can read everything you need to know about the increase and what it means for consumer loans.
A bipartisan deal “big win” for our economy, Biden writes
On Wednesday evening, the House of Representatives passed the Fiscal Responsibility Act to raise the debt ceiling and prevent a default on the national debt. Late Thursday evening, the Senate followed suit and passed the House-passed bill.
The compromise proposal to raise the debt ceiling passed the Senate by a margin of 63 to 36. Although there was not agreement on everything, the bill was quickly discussed and approved. Because the government lacked the necessary resources to prevent defaults, US Treasury Secretary Janet Yellen set a June 5 deadline for Congress.
Biden expected to sign the bill immediately
“No one gets everything they want in a negotiation,” President Biden said wrote on Twitter after the final vote on Thursday evening. “But make no mistake: This bipartisan agreement is a major victory for our economy and the American people.”
“Our work is far from done, but I look forward to signing this bill into law as soon as possible and speaking directly to the American people tomorrow,” his message concluded.
How a Debt Bankruptcy Would Have Affected Consumers
Considering that the US has never defaulted on its debts, the impact would have been unprecedented. However, experts predicted that this is likely to trigger a recession due to the already fragile state of the economy.
The Federal Reserve has already raised interest rates to historic levels in an effort to cool a red-hot economy, and even though inflation is at a record high and talk of a recession has become popular among economists, the unemployment rate is at an all-time high. a historically low level.
Due to this unusual macroeconomic environment, the consequences of debt default would have had the potential to plunge the US into a full-blown recession, Thirdway said in a 2023 report. Debt limit standard report. The report not only predicts that the cost of goods and services will rise for Americans, but also predicts that it will become more difficult to borrow, as almost every consumer loan product will be affected.
Why the Fiscal Responsibility Act Matters for the Health of Consumer Lending
In early March 2023, Federal Reserve Chairman Jerome Powell called on Congress to raise the ceiling on the national debt, claiming that a potential default “could be extremely detrimental and cause long-lasting damage.”
Even though it seems like the US government’s default would have no direct effect on the average consumer, that couldn’t be further from the truth. If Congress had not passed the bill when they did, the consumer lending market would likely have undergone a massive shake-up, including another round of rate hikes on products like personal loans.
Consumer loans would have been harder to obtain and more expensive
The cost of consumer loans has subsequently risen in recent months, with the average interest rate on personal loans standing at 11.04 percent. The market has already become more competitive, with stricter eligibility criteria for lenders, especially for subprime borrowers.
Thirdway predicted that credit would tighten even further if the U.S. defaults on its debt payments, especially for those seeking small business loans or individual consumer loans. It was also predicted that products such as personal loans, car loans and student loans would become less eligible due to a liquidity shortage.
Essentially, a liquidity shortage occurs when there is a shortage of borrowing money available to people and businesses. In this case, this would be the result of reduced availability of credit, because banks reserve as much money as possible. “Once the dominoes of bankruptcy – rising Treasury yields, falling stock markets, rising mortgage rates – start to fall, lending to small businesses and consumers will contract,” the report said.
Rate increases would have been likely
If the US were to default on its debt and lenders tightened their belts, it is highly likely that remaining credit would be more expensive. It is likely that banks will continue to raise interest rates on their consumer loans due to reduced lending. In addition, all variable rate products tied to federal funds rates – auto, student and personal loans – would also rise in response to market volatility.
Thirdway claims this would make purchases more expensive, leading to an overall downward trend in consumer spending. This, combined with the job losses resulting from the bankruptcy, could have contributed to the likelihood of an economic recession.
What is a national debt default?
Default on a loan means that the balance is not paid within the required time period (for individual consumer loans this is 270 days). According to the U.S. Treasury Department, the national debt has risen every year for the past decade and the U.S $2.46 trillion thus far in fiscal year 2023.
Because the government’s annual expenditures exceed tax revenues, Congress approves a debt ceiling increase every one to two years, allowing the Treasury Department to increase the amount borrowed.
Similar to defaulting on a consumer loan, the US could default on its unpaid debt – all $31.4 trillion of it – and face negative economic and financial consequences if the cap is not raised .
However, instead of belonging to one person, this debt is considered the country’s debt. Therefore, the impact would be on a larger scale and it is likely that most, if not all, US consumers would feel the effects of a national bankruptcy.
Why the government was at risk of going bankrupt
Last January, the US reached its borrowing limit of $31.4 trillion. Since then, US Treasury Secretary Janet Yellen wrote that the Treasury Department “extraordinary measures‘To prevent the country from ending up in bankruptcy.
In her Jan. 19 letter to all congressional leaders, she urged Congress to enact a debt limit and asked leaders to “act immediately to protect the full confidence and credit of the United States.” Yellen also wrote that these “extraordinary measures” being taken to keep the country afloat are subject to “significant uncertainty.”
Why it took so long for Congress to reach an agreement
Despite Yellen’s January call for action and Powell’s concerns, Congress only just reached a bipartisan deal on the debt ceiling.
In March, Powell urged Congress to reach a conclusion and raise the debt ceiling as concerns about defaults mounted. “Ultimately, there is only one solution to this problem and that is Congress,” he said. “Congress really needs to raise the debt ceiling. That is the only way out.”
Raising the debt ceiling has been a divisive conversation between the Republican-controlled House of Representatives and the Democratic-majority Senate, leading to an ongoing political dispute. Some Republican leaders opposed the idea of increasing the budget until Democrats agreed to spending cuts and budget cuts.
A similar situation occurred in 2011, when President Barack Obama was in power. Republicans had regained control of the House of Representatives and advocated spending cuts to raise the debt ceiling, while some Democratic lawmakers called on the president to cancel the debt through an executive order.
How borrowers can protect their finances
From now on, the US is no longer at risk of defaulting on its debts. However, during this time of general economic uncertainty and changing market volatility, it is still wise to pay particular attention to your emergency savings and current financing costs.
While it may not be necessary to dive in, building a savings fund is a great way to ensure economic stability should something happen, like a recession. Take the time to build your credit score before applying for a loan to increase your chances of getting a more competitive rate. Unless absolutely necessary, the near future may not be the best time to take out a loan due to high interest rates. If possible, take some time to build your credit score before applying for a loan to increase your chances of getting a more competitive rate.
