The Damage of Debt
Abstract
In the consumer protection context, most research on American families assesses the extent of harm from overindebtedness along a single dimension: debt, or its kissing cousin, wealth. This essay examines the limitation of this analytical approach and argues that unmanageable debt may harm families’ well-being in ways that cannot be captured by financial measures. This critique may be particularly apt in the context of fringe lending, which often consists of small dollar loans that do not register as measurable harms using traditional metric of dollars of debt to assess harm. Drawing on the poverty economics and its concern with human capabilities, I make a parallel between the limitations of income to assess the harms of poverty and the limitations of debt to assess the harms of borrowing. I construct a multidimensional framework for studying the nonfinancial harms of debt that examines how borrowing may alter people’s preferences, endowments, and access to social opportunity. I apply these concepts to the existing research on the nonfinancial harms of overindebtedness and suggest new avenues for empirical research. A richer framework for assessing the damage of debt will improve the regulation of the consumer credit markets by providing policymakers with information on the nonfinancial harms of borrowing.