US consumers are strapped, and now that their personal ATM machines houses are depreciating, they’re being forced to look elsewhere for cash to pay today’s bills. The WSJ catalogues a handful of the increasingly popular products that have been rushed onto the market to address this need:
- Life settlements. Sell the life insurance policy you’ve been making payments on for years for about 20% of the face value. The company that buys it will keep making the payments–and collect the full value when you die.
- “Reverse mortgages.” Take out another mortgage, but one that doesn’t require monthly payments–only a bullet payment when you die or leave the house for a year.
- 401k loans. Pay interest on money you already have–but spend that money now instead of letting it compound for your retirement.
- Other creative products, including one called the REX Agreement that allows you to sell 13% of your house today in exchange for a future repayment of this amount plus 50% of the change in value of the house from the current appraised value. (Need more details to better understand this one…all help appreciated).
None of these products are evil on their faces, and, used responsibly, they give people more flexibility. They are generally very expensive, however, and provide yet another way for consumers to meet today’s obligations and desires by levering themselves to the hilt. Their increasing popularity also begs the question: What happens when consumers don’t have any home equity, nest eggs, or life insurance policies left to sell?
Nationwide statistics on the amount of such alternative debt (or nest egg firesales) is hard to come by, but the WSJ includes a couple of helpful charts. First, an acceleration in the number of Vanguard customers tapping their 401ks:
Second, a continued growth in traditional revolving debt–8% year over year–as consumers max out credit cards: