What is Consumer Interest?

Consumer interest can have two definitions, which are distances apart in terms of meaning. In the first sense, consumer interest can be defined as those things in which the mass market, and average consumers (like most of us), are interested. This is a frequent usage of the term in economy reports on what people are buying. For instance a headline like “Consumer Interest in Mini-Vans Declines,” would suggest the public is less interested in purchasing mini-vans.

The other way in which consumer interest is used is to define certain types of interest that consumers must pay when they take out specific types of loans. Generally consumer interest refers to the interest accrued on personal loans and on credit cards. It tends to exclude any type of interest that is tax deductible, like a home mortgage or a loan to start a business. An assessment of how much consumer interest is accrued in a given period can suggest many things about the economy. For instance, it can show if people are spending more by using credit cards, or if they’ve cut spending in general. Estimates of interest owed can also be used to understand interest rates and just how indebted most consumers are.

For a long while in the US Tax Code, most types of interest were considered deductible. This changed with reforms to the IRS code with the Tax Reform Act of 1986. The provisions in the Reform Act didn’t fully take effect until 1991 but they included disallowing many forms of interest, most often consumer interest, as not deductible in most cases. People who had credit cards or auto loans in the 1980s probably well remember that they were able to claim tax credit for paying interest on these loans before 1991.

Today, tax deductible interest is usually only reserved for loans that are taken out for things like mortgages, business investments or education. It’s a good idea to understand the distinction between nondeductible and deductible interest, especially if you taking out a loan for what might be a deductible expense. If you want to go back to school for instance, from a tax perspective, it might make more sense to take out a student loan, than it would to take out a personal loan. It’s easy to prove the student loan was used for the purpose of education, and that the interest you’ll eventually pay on it is not consumer interest. This argument may be more difficult to make if you use a personal loan instead to pay for your education.