overborrowing

Overborrowing is the situation in which a borrower takes on more debt than can reasonably be serviced from expected income, revenues, or asset values. It can occur to individuals, businesses, and governments and is often triggered when borrowing costs are low, credit is readily available, or forecasts overestimate future cash flows. When anticipated repayments become unsustainable, the risk of default, financial distress, or insolvency increases.

For individuals, signs include rising debt service relative to income, frequent refinancing, and high credit utilization. Consequences include missed payments, damaged credit scores, and, in severe cases, bankruptcy or loss of assets. For firms, high leverage can erode interest coverage, constrain investment, and lead to liquidity crunches if refinancing proves difficult or rates rise. For governments, excessive debt can raise borrowing costs, crowd out essential spending, and undermine fiscal credibility, potentially triggering downgrades or bailout needs.

Measures used to assess and mitigate overborrowing include debt-to-income and debt-service-to-income ratios for households, leverage ratios and interest coverage for firms, and debt-to-GDP and debt service indicators for governments. Policy tools include prudent lending standards, macroprudential limits (such as loan-to-value and debt-to-income caps), stress testing, and debt management strategies. In extreme cases, debt restructuring or relief may be pursued to restore sustainability.