WHAT IS 'Consumer Interest'

Consumer interest is any interest charge on personal loans, including automobile loans and credit card debt. Consumer interest is nondeductible, excluding mortgage interest and some interest charged on student loans.

BREAKING DOWN 'Consumer Interest'

Consumer interest dates back as far as the 18th Century, B.C. in Babylon, when Hammurabi’s Code instituted a 20 percent cap on personal loan interest. Evidence of consumer credit continue through ancient history until the Dark Ages, when the collapse of the Roman Empire led to economic stagnation, and the Catholic Church outlawed usury, the charging of interest. Capital and credit played an important role in financing the age of exploration, and King Henry VIII of England established the first national interest rate of 10 percent in 1545.

Consumer credit boomed in the United States in the early and mid 20th Century. This growth in lending was inspired by early automotive loans offered by General Motors Acceptance Corporation. The success of such manufacturer-sponsored credit led other companies to extend credit to buyers of household appliances, furniture, and electronics. As early as 1920, companies issued early credit cards that consumers could use to purchase their products. In 1950, Diners’ Club issued the first universal credit card, followed by American Express in 1958. Credit reporting agencies emerged at this time to provide lenders with consumer credit histories.

Consumer debt in the late 20th century

The Tax Reform Act of 1986 broadened the definition of consumer interest by revoking the deductibility of certain types of interest. The Act, which did not take full effect until 1991, eliminated interest deductions on credit card debt and automotive loans. It left intact the deductibility of interest associated with home ownership, higher education, and business investments.

Consumer debt, tracked by the Federal Reserve as revolving debt, has grown steadily since the introduction of credit cards. U.S. consumer debt in early 2018 was reported to be over $3 trillion. During times of high interest rates, excessive consumer debt can have a negative effect on further consumer spending.

The home equity loan as a tax shelter for consumer interest

In the past, many consumers used home equity loans as a means to convert consumer interest from credit cards or other spending into deductible mortgage interest. By paying off consumer debt with a home equity line of credit, or HELOC, these homeowners were able to deduct a portion of their credit card debt. The Tax Cuts and Jobs Act of 2017 eliminated this practice through 2026, mandating that HELOC interest is only deductible if it relates directly to a home purchase or construction.

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