NEW YORK -- When Mike Gisriel decided to buy a new car fo his frequent commutes from Baltimore to Annapolis, he came up with some creative financing. Instead of taking out a car loan with an interest rate of about 12 percent, he got a $25,000 home equity loan at just 7.5 percent.
That saves him more than $100 a month in interest payments. And the payments are tax-deductible, just like a regular mortgage.
"If you need cash right now and you're an average middle-class )) guy, home equity loans are the best deals around," the 42-year-old lawyer said.
Such financing, a boon to many consumers, illustrates a kind of "hidden" debt that is forcing economists to re-evaluate the nation's recovery. Their conclusion: Over the past two years, Americans have been borrowing more than was realized. And that dims prospects for a strong, consumer-driven economic recovery this year.
Credit counselors also are beginning to see the impact of "hidden" debt, such as home equity loans and car leases, which aren't reflected in the traditional measures of consumer debt. At the Baltimore Credit Counseling Center, for example, home equity loans are an issue in about 20 percent of the cases.
"Consumers have been substituting home equity borrowing for traditional forms of borrowing. It turns out that consumers may not be all that far along in paying off their accumulated debt as once thought," said Francesca Eugeni, a staff economist with the Federal Reserve Bank of Chicago and author of a recent study on consumer borrowing.
That's important because economists had believed that the slowdown of the past two years was caused partly by consumers paying off debts accumulated in the 1980s. This thriftiness was thought to be throttling consumer spending, which accounts for two-thirds of the nation's economic activity.
In light of recent research, however, this appears not to have been true, prompting economists to rethink their traditional analysis of consumer borrowing patterns and to reconsider the health of the current recovery.
For months, statistics seemed to show that consumers were indeed paying off their debts. Installment consumer credit, which includes credit cards and check credit at commercial banks, decreased by about $13 billion from 1990 to the fall of 1992. Many economists believed that the reduction led consumers to begin a buying binge shortly after the presidential election.
But that overlooked the boom in hidden debt. Total home mortgage debt, for example, increased by about $250 billion from 1990 to the fall of 1992.
The reason: Americans were taking advantage of tax code changes that made other forms of borrowing more expensive. But they weren't buying homes with the new mortgages; instead, they had discovered a new line of credit that could be used for big-ticket purchases.
Meanwhile, more people were leasing cars instead of borrowing to buy -- another practice that isn't reflected as a form of debt. The value of cars leased by consumers shot up from $8.3 billion in 1986 to $12.7 billion in 1992.
So, even as credit-card debt was falling and traditional auto loans were stalled, total consumer credit rose steadily, from $28.9 trillion in 1990 to $31.4 trillion last year, according to the Federal Reserve.
That has added to suspicions that the five-month, postelection spending spree cannot be sustained without more prolonged belt-tightening by consumers. Americans also appear troubled by continued uncertainty about employment and taxes.
"Yes, [installment] debt is down a little bit, but people are in more of a tight squeeze than expected. They may well not yet be in a position to support a strong recovery," said David Levy of the Jerome Levy Economics Institute.
Take Sue Wilson as an example. The 42-year-old tax specialist and her husband recently took out a loan on their Annapolis home to secure a $20,000 line of credit. Although they will use most of it to renovate their basement, $1,500 has already gone toward paying off a car loan.
Judging by traditional measures of consumer credit, it would seem that Ms. Wilson and her husband have cut their debt -- more evidence that the Wilsons have saved money and are ready to spend.
In fact, paying off the car loan left them just as indebted. And they may even be more cautious about spending: If they had defaulted on a car loan, they would have lost their car; defaulting on a home equity loan could mean losing their house.
"The problem with [a home equity loan] is that if you don't pay it down quickly, it becomes like a second mortgage, and you get burdened by it," Ms. Wilson said.